First Capital Realty Inc. Annual Report 2016

Plain-text annual report

BUILT TO DELIVER FIRST CAPITAL REALTY INC. 2016 ANNUAL REPORT Well Deﬁned Strategy CORPORATE PROFILE First Capital Realty (TSX: FCR) is one of Canada’s largest owners, developers and managers of grocery-anchored, retail-focused urban properties where people live and shop for everyday life. As at December 31, 2016, the Company owned interests in 160 properties, totaling approximately 25.3 million square feet of gross leasable area. At December 31, 2016, First Capital Realty had an enterprise value of $9.2 billion. The common shares of the Company trade on the Toronto Stock Exchange. BUSINESS STRATEGY First Capital Realty’s primary strategy is the creation of value over the long term by generating sustainable growth in cash flow and capital appreciation of its portfolio. To achieve the Company’s strategic objectives, Management continues to: • undertake selective development, redevelopment and repositioning activities on its properties, including land use intensification; • be focused and disciplined in acquiring well-located properties, primarily where there are value-creation opportunities, including sites in close proximity to existing properties in the Company’s target urban markets; • proactively manage its existing portfolio to drive rent growth; • increase efficiency and productivity of operations; and • maintain financial strength and flexibility to achieve a competitive cost of capital. PROPERTY RENTAL REVENUE ($ millions) CAGR 5.4% TOTAL NOI ($ millions) CAGR 4.7% 684 652 662 634 581 427 399 409 415 369 TOTAL ASSETS ($ billions) Total assets $ Unencumbered assets $ % Debt to total assets 7.3 7.6 7.9 9.2 6.6 8.3 5.8 5.0 42.2 42.9 42.6 4.3 42.9 3.4 42.1 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 Best in Class Properties (cid:31) Greater Toronto Area (cid:31) Greater Montreal Area (cid:31) Greater Calgary Area (cid:31)(cid:3)Greater Vancouver Area (cid:31)(cid:3)Greater Edmonton Area (cid:31)(cid:3)Greater Ottawa Area (cid:31) Golden Horseshoe Area (cid:31)(cid:3)London Area (cid:31)(cid:3)Quebec City (cid:31) Red Deer and Other Total 33% 15% 12% 11% 10% 6% 6% 3% 2% 2% 100% URBAN MARKETS High-quality portfolio of Canadian urban retail assets Over 95% of the Company’s annual minimum rent is derived from urban markets with high barriers to entry PORTFOLIO DEMOGRAPHICS Industry-leading demographic proﬁle Annual Minimum Rents as of December 31, 2016 207,000 134,000 $106,000 $76,000 2009 2016 2009 2016 5 Km Population 5 Km Household Income FCR Portfolio Demographics INDUSTRY-LEADING PERFORMANCE Track record of above- industry-average Same Property NOI growth 6.8% 4.9% 3.8% 3.4% 2.5% 2.3% 3.7% 3.7% 3.2% 5 year average – 2.8% 10 year average – 3.5% 1.1% 07 08 09 10 11 12 13 14 15 16 Total Same Property NOI Growth INVESTMENT Approximately $1 billion planned investment in existing properties with development potential $1B Sustainable Cash Flow HIGHLIGHTS TENANT PROFILE 143 of 160 properties, or 95% of the portfolio fair value is supermarket and/or drugstore anchored Annual minimum rents Over 90% of revenue comes from necessity-based retail (~35% from e-commerce proof categories) 9 of the top 10 tenants have investment-grade credit ratings Track record of consistently high occupancy Investment-grade credit ratings from Moody’s: Baa(2) and DBRS: BBB (high) 23 consecutive years of paying dividends Focused sustainability program – listed on Corporate Knights Future 40 Responsible Corporate Leaders in Canada in 2014, 2015 and 2016 9% 18% 5% 30% 8% 3 5 % 16% E - C O M M 14% E R CE PRO O F T E N A N T S (cid:31) Supermarkets, drugstores and liquor stores (cid:31) Banks & Credit Unions (cid:31) Restaurants & Cafes (cid:31)(cid:3)Medical, Professional & Personal Services (cid:31)(cid:3)Fitness Facilities, Daycare & Learning Centres (cid:31) Other Necessity-based Retailers (cid:31) Other Tenants Total 30% 8% 14% 16% 5% 18% 9% 100% TOP 10 TENANTS TOTAL PORTFOLIO OCCUPANCY 5 year average – 95.4% 10 Year average – 95.6% 96.4% 96.2% 96.4% 96.2% 96.0% 95.6% 95.5% 95.3% 94.8% 95.0% 07 08 09 10 11 12 13 14 15 16 Financial Highlights As at December 31 Reﬂects joint ventures proportionately consolidated. (millions of dollars, except per share amounts) Total assets Total equity market capitalization(1) Enterprise value(1) Net debt to total assets Annual dividend per common share Operating Highlights As at December 31 Reﬂects joint ventures proportionately consolidated. (millions of dollars, except per share amounts) Property Rental Revenue Net Operating Income (“NOI”)(1) Funds from Operations (“FFO”)(1) Operating FFO Operating FFO per diluted share FFO FFO per diluted share Adjusted Funds from Operations (“AFFO”)(1) Operating AFFO Operating AFFO per diluted share AFFO AFFO per diluted share (1) These measures are not deﬁned by IFRS. Refer to the company’s Management’s Discussion & Analysis for further information. 2016 $ 9,171 $ 5,033 $ 9,162 42.6% $ 0.86 2016 $ 684 $ 427 $ 261 $ 1.10 $ 263 $ 1.11 $ 261 $ 1.07 $ 265 $ 1.08 2015 $ 8,284 $ 4,139 $ 8,031 42.9% $ 0.86 2015 $ 662 $ 415 $ 236 $ 1.05 $ 221 $ 0.99 $ 243 $ 1.02 $ 244 $ 1.03 Message from the President & CEO Dear Fellow Shareholder, In my ﬁrst letter to you last year, I noted that 2015 would likely be remembered as a year of transition. Notwithstanding that the business was and continues to be in excellent shape, we made several changes in order to maximize our performance as we looked ahead to our next phase of growth. Our 2016 results were positively impacted by the traction we now have from these changes, which I expect will be carried into 2017 and beyond. In order for a publicly listed real estate company to be successful, it must deliver both Net Asset Value (NAV) growth and Funds from Operations (FFO) growth, both measured on a per-share basis, of course. Our track record of creating value through growth in NAV per share is something we are very proud of. While we have a history of growing our FFO per-share as well, I will be frank by saying our historical FFO growth, considering our industry-leading property-level performance, has not met expectations (including our own). Therefore, growing our FFO per-share was a metric that we identiﬁed as a top priority. In 2016, we were pleased with our progress. We translated our property-level performance into FFO growth that exceeded the expectations we had at the beginning of the year. FFO per diluted share increased to $1.11 in 2016 from $0.99 in 2015, representing an increase of 12%. We had several one-time items that impacted these ﬁgures. Accordingly, we also continued to focus on Operating Funds from Operations (OFFO), a more normalized metric. The result however, was similar. We reported OFFO per share equal to $1.10 in 2016, which is the highest in FCR’s history, representing an increase of 4.7% over the prior year. OFFO Per Share $1.10 $1.04 $1.05 2014 2015 2016 Continuing Strong Performance We continued to perform very well at the property level in 2016. Despite several macro headwinds, as always, we remained focused on the micro factors, which resulted in high occupancy levels, above-industry-average rental-rate increases on lease renewals, and growth in same-property NOI. It was another active year on the leasing front with a total of 2.6 million square feet of completed lease transactions. This resulted in a 20 bps increase to occupancy, which stood at 95.0% at year-end with the opportunity for further improvement before we reach our historical long-term average occupancy. We achieved a rental rate increase on 1.6 million square feet of lease renewals equal to 7.5% (8.2% on 1.5 million square feet in our same property portfolio). Together with new space completed from our development program (average net rental rate of $31.96 per square foot) and new leasing in the balance of the portfolio where market rental rates are well in excess of those in-place, our total average net rental rate increased by 2.9% to $19.39 per square foot, up from $18.84 per square foot in 2015. A key measure of a real estate portfolio’s year-over-year performance is same-property NOI. In 2016, same property NOI rose 1.1%. While it was below our historical average, we were pleased as 2016 was not a typical year. First, we had above-average lease-termination-fee income of $3.0 million in the second quarter of 2015, which would not repeat in 2016. Second, we were transitioning an above-average amount of anchor tenant space, most notably Target. This anchor space created a signiﬁcant value-creating opportunity for us as we entered into new leases at higher current market rents. This is great news, but much of this space was not income-generating in 2016 as the space was being prepared for our new tenants to open. Many of these tenants are now operating and paying rent. Therefore we expect our 2017 same-property NOI growth to resume to a level that is more typical for FCR. From a balance sheet perspective, we maintained a strong and ﬂexible ﬁnancial position at year-end with a conservative debt-to-asset ratio. In total, we raised $1.0 billion of equity and debt capital to fund our growth and satisfy our obligations in 2016. We continued to maintain a well-staggered debt maturity proﬁle with a weighted average term of 5.5 years. We also reduced our weighted average interest rate to 4.5% at the end of 2016 from 4.7% in 2015. Our unencumbered assets grew by $800 million to $6.6 billion, which represented 72% of our total assets at the end of 2016 and provides us with tremendous ﬁnancial ﬂexibility going forward. While we are comfortable with our ﬁnancial position today, our goal is to reduce our leverage over time, speciﬁcally our debt-to-EBITDA ratio. We would also like to reduce our OFFO payout ratio in order to retain even more operating cash ﬂow, after the payment of dividends, to more efﬁciently fund our growth. In 2016, our OFFO payout ratio improved by 400 bps to 78% versus 2015. In 2016, First Capital shareholders received a total return equal to 17.3%. However, our focus continues to be on long-term returns and we are proud that we have outperformed the TSX Capped REIT Index and the TSX Composite Index over each of the last 3, 5, 10 and 16 years (the inception period from which we measure ourselves). First Capital Realty S&P/ TSX Capped REIT Index S&P/TSX Composite 10.1% 7.3% 7.1% 8.4% 6.4% 8.2% 7.4% 6.3% 4.7% 15.4% 10.4% 6.0% 3 Year 5 Year 10 Year 16 Year (Inception Period) KING HIGH LINE, TORONTO MOUNT ROYAL VILLAGE, CALGARY 3080 YONGE STREET, TORONTO High-Quality Portfolio Our high-quality property portfolio is clearly one of our competitive advantages, which consisted of interests in 160 retail properties at year-end, totaling 25.3 million square feet of gross leasable area with an IFRS fair value of $8.7 billion. Our properties are well located in Canada’s large urban growth markets. The population and household income within ﬁve kilometres of our properties average 207,000 and $106,000 respectively, which have increased signiﬁcantly from 134,000 and $76,000 just a few years ago. We are a true leader amongst our Canadian retail peers when it comes to portfolio demographics and we will continue to pay close attention to these important metrics by investing our capital in markets where the population is expanding at a rate that exceeds the ability to add new retail space. Over time, this will increase sales per square foot in our properties, which in turn will increase rents at a pace that exceeds the industry average. We strongly believe over the long term that the demographic proﬁle of our portfolio will be one of our most signiﬁcant competitive advantages. Our shopping centres are occupied by Canada’s leading retailers who provide necessity-based goods and services, meaning those that consumers generally buy regardless of the economic environment. At December 31, 2016, our portfolio included 132 grocery stores, 135 pharmacies, 96 liquor stores, 82 ﬁtness facilities, 89 daycare and learning centres and 965 cafes and restaurants, amongst many other retailers that consumers frequent as part of their everyday life. Notably, nearly 35% of our total rent is now earned from retailers whose businesses are e-commerce-proof, including ﬁtness centres, medical service providers, nail and hair salons, restaurants, child- care centres and numerous others with the balance being largely e-commerce-resistant. It is the quality of our tenant base, as well as our focus on necessity-based retail in the best urban locations, that has generated such strong operating performance through both robust and challenging economic times and that will lead to continued growth and stability in the years ahead. In 2016, we further improved our already high-quality portfolio of retail assets. In total, we invested $655 million in development, re-development, acquisitions and intensiﬁcation initiatives. During the year, we transferred 182,000 square feet of new urban retail space in our key Toronto, Montreal, Edmonton, Calgary and Vancouver markets from development to our income-producing portfolio at a cost of $189 million. Development, re-development and asset re-positioning have been core competencies at First Capital since inception and is now another one of our key competitive advantages. We currently have an active development program that will continue to add exceptional urban retail assets to our portfolio for years to come, assets that we simply cannot buy today. We are well underway with a number of large development projects that will be completed over the next two years, including Yorkville Village, King High Line and 3080 Yonge Street in downtown or midtown Toronto, as well as the Brewery District in downtown Edmonton and Mount Royal Village in downtown Calgary. We made signiﬁcant advances in all of these projects during 2016 and each will meaningfully contribute to our existing high-quality portfolio of income-producing urban retail assets. At completion, these ﬁve assets will comprise 1.3 million square feet at a total estimated cost of approximately $1.0 billion at First Capital’s share. We have also identiﬁed some of the next properties we plan to re-develop, which include the former Christie Cookie Factory we acquired in 2016. Our team is very excited about this speciﬁc acquisition and the opportunity to oversee the development of a 27-acre mixed-use community with a high-quality urban design. The redevelopment of this important site will integrate a range of uses and densities near Toronto’s waterfront, including a signiﬁcant retail component where we can apply the best of what we’ve learned over many years in urban retail development. YORKVILLE VILLAGE, TORONTO New Avenue Road façade The Oval The Lane (new Yorkville entrance) One of the unique attributes of First Capital Realty is the depth of our pipeline of development and re-development opportunities in the portfolio of properties we own. To date, we have identiﬁed 3 million square feet of retail density and 11 million square feet of residential density that can be incrementally added to our existing properties. Even without any external acquisitions, our current pipeline will keep us busy creating value for many years to come. That said, I do expect we will periodically add to this pipeline through the selective acquisition of properties with future development potential when appropriate as we did in 2016. Outlook Like many industries, real estate, and retail speciﬁcally, is undergoing a great deal of change. One of the things we are most proud of is our track record of recognizing evolving trends and creating opportunities out of them. There are dozens of examples I can point to, but a review of our current tenant roster highlights this point. The majority of our tenants and the retail categories they operate within are performing well while those tenants who are facing signiﬁcant challenges in today’s climate, are scarce in our portfolio. As well, it is largely by design, not accident, that such a high component of our income (and growing) comes from e-commerce-proof businesses (~35%). The retail landscape will continue to evolve at a rapid pace. The location and quality of our portfolio, including the demographic proﬁle of our properties and the barriers to entry for new supply, give us a lot of comfort that our real estate will continue to be in high demand. As we apply the capabilities of our platform to this irreplaceable portfolio, we are positioned to experience continued escalation in rental rates and portfolio value over the long term. What’s more, with the stability of our high-quality covenant and necessity-based retail tenants, we should achieve this with relatively less volatility. I am personally very optimistic about our future. I believe we have all of the right ingredients for success. It starts with the right strategy for the road that lies ahead and extends to having the right people, properties, tenant base, brand and balance sheet. Real estate is a long-term business and First Capital is best suited for investors with an investment horizon that extends over many years. In 2016, we continued to build on our solid foundation and made many decisions with the next decade and beyond in mind. I will conclude by thanking the First Capital team for their tireless efforts executing our strategy in what was a very successful year, our Board of Directors for their ongoing guidance and support, our tenants for collaboratively working with us to mutually achieve our respective objectives, our partners and service providers for their contributions and conﬁdence in us, the communities in which we operate for supporting our properties and, most important, our shareholders for the privilege of managing your great Company. Respectfully, Adam Paul President and Chief Executive Ofﬁcer MD&A MANAGEMENT’S DISCUSSION AND ANALYSIS MD&A MANAGEMENT’S DISCUSSION AND ANALYSIS Table of Contents 1 1 2 6 8 9 11 11 15 15 16 17 17 17 17 18 19 22 23 26 27 28 28 28 29 31 32 Introduction Forward-looking Statement Advisory Business Overview and Strategy Outlook and Current Business Environment Corporate Responsibility and Sustainability Summary Consolidated Information and Highlights Business and Operations Review Real Estate Investments Investment Properties — Shopping Centres 2016 Acquisitions 2015 Acquisitions 2016 Dispositions 2015 Dispositions Impact of Acquisitions and Dispositions Capital Expenditures Valuation of Investment Properties Properties Under Development Main and Main Developments Leasing and Occupancy Top Forty Tenants Lease Maturity Profile Loans, Mortgages and Other Real Estate Assets Results of Operations Net Income Reconciliation of Consolidated Statements of Income, as presented, to the Company’s Proportionate Interest Net Operating Income Interest and Other Income 33 33 34 34 35 38 38 39 40 40 41 42 43 44 44 44 45 45 46 46 47 47 48 48 50 51 52 Interest Expense Corporate Expenses Other Gains (Losses) and (Expenses) Income Taxes Non-IFRS Supplemental Financial Measures Capital Structure and Liquidity Total Capital Employed Credit Ratings Consolidated Debt and Principal Maturity Profile Mortgages Credit Facilities Senior Unsecured Debentures Convertible Debentures Shareholders’ Equity Liquidity Cash Flows Contractual Obligations Contingencies Dividends Summary of Financial Results of Long-term Debt Guarantors Related Party Transactions Subsequent Events Quarterly Financial Information Critical Accounting Estimates Future Accounting Policy Changes Controls and Procedures Risks and Uncertainties Management’s Discussion and Analysis of Financial Position and Results of Operations INTRODUCTION This Management’s Discussion and Analysis (“MD&A”) of the financial position and results of operations of First Capital Realty Inc. (“First Capital Realty”, “FCR” or the “Company”) is intended to provide readers with an assessment of performance and summarize the financial position and results of operations for the years ended December 31, 2016 and 2015. It should be read in conjunction with the Company’s audited annual consolidated financial statements for the years ended December 31, 2016 and 2015. Additional information, including the Company's current Annual Information Form, is available on the SEDAR website at www.sedar.com and on the Company’s website at www.fcr.ca. All dollar amounts are in thousands of Canadian dollars, unless otherwise noted. Historical results and percentage relationships contained in the Company’s unaudited interim and audited annual consolidated financial statements and MD&A, including trends which might appear, should not be taken as indicative of its future operations. The information contained in this MD&A is based on information available to Management and is dated as of February 14, 2017. First Capital Realty was incorporated in November 1993 and conducts its business directly and through subsidiaries. FORWARD-LOOKING STATEMENT ADVISORY Certain statements contained in this MD&A constitute forward-looking statements. Other statements concerning First Capital Realty’s objectives and strategies and Management’s beliefs, plans, estimates and intentions also constitute forward-looking statements. Forward-looking statements can generally be identified by the expressions “anticipate”, “believe”, “plan”, “estimate”, “project”, “expect”, “intend”, “outlook”, “objective”, “may”, “will”, “should”, “continue” and similar expressions. The forward-looking statements are not historical facts but, rather, reflect the Company’s current expectations regarding future results or events and are based on information currently available to Management. Certain material factors and assumptions were applied in providing these forward-looking statements. Forward-looking information involves numerous assumptions such as rental income (including assumptions on timing of lease-up, development coming online and levels of percentage rent), interest rates, tenant defaults, borrowing costs (including the underlying interest rates and credit spreads), the general availability of capital and the stability of the capital markets, amount of development costs, capital expenditures, operating costs and corporate expenses, level and timing of acquisitions of income-producing properties, number of shares outstanding and numerous other factors. Moreover, the assumptions underlying the Company’s forward-looking statements contained in the “Outlook and Current Business Environment” section of this MD&A also include that consumer demand will remain stable, and demographic trends will continue. Management believes that the expectations reflected in forward-looking statements are based upon reasonable assumptions; however, Management can give no assurance that actual results will be consistent with these forward- looking statements. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including the matters discussed in the “Risks and Uncertainties” section of this MD&A and the matters discussed under “Risk Factors” in the Company’s current Annual Information Form from time to time. Factors that could cause actual results or events to differ materially from those expressed, implied or projected by forward-looking statements, in addition to those factors referenced above, include, but are not limited to: general economic conditions; real property ownership; tenant financial difficulties; defaults and bankruptcies; the relative illiquidity of real property; increases in operating costs and property taxes; First Capital Realty’s ability to maintain occupancy and to lease or re-lease space at current or anticipated rents; the availability and cost of equity and debt capital to finance the Company's business, including the repayment of existing indebtedness as well as development, intensification and acquisition activities; changes in interest rates and credit spreads; changes to credit ratings; the availability of a new competitive supply of retail properties which may become available either through construction, lease or sublease; unexpected costs or liabilities related to acquisitions, development and construction; geographic and tenant concentration; residential development, sales and leasing; compliance with financial covenants; changes in governmental regulation; environmental liability and compliance costs; unexpected costs or liabilities related to dispositions; challenges associated with the integration of acquisitions into the Company; uninsured losses and First Capital Realty’s ability to 1 FIRST CAPITAL REALTY ANNUAL REPORT 2016 obtain insurance coverage at a reasonable cost; risks in joint ventures; matters associated with significant shareholders; investments subject to credit and market risk; loss of key personnel; and the ability of tenants to maintain necessary licenses, certifications and accreditations. Readers, therefore, should not place undue reliance on any such forward-looking statements. Further, a forward-looking statement speaks only as of the date on which such statement is made. First Capital Realty undertakes no obligation to publicly update any such statement or to reflect new information or the occurrence of future events or circumstances, except as required by applicable securities law. All forward-looking statements in this MD&A are made as of February 14, 2017 and are qualified by these cautionary statements. BUSINESS OVERVIEW AND STRATEGY First Capital Realty (TSX : FCR) is one of Canada’s largest owners, developers and managers of grocery anchored, retail- focused urban properties where people live and shop for everyday life. As at December 31, 2016, the Company owned interests in 160 properties, totaling approximately 25.3 million square feet of gross leasable area (“GLA”). First Capital Realty’s primary strategy is the creation of value over the long term by generating sustainable growth in cash flow and capital appreciation of its shopping centre portfolio. To achieve the Company’s strategic objectives, Management continues to: • undertake selective development, redevelopment and repositioning activities on its properties, including land use intensification; • be focused and disciplined in acquiring well-located properties, primarily where there are value creation opportunities, including sites in close proximity to existing properties in the Company’s target urban markets; • proactively manage its existing shopping centre portfolio to drive rent growth; • increase efficiency and productivity of operations; and • maintain financial strength and flexibility to achieve a competitive cost of capital. Shopping for Everyday Life® The Company primarily owns, develops and manages properties that provide consumers with products and services that are considered to be daily necessities or non-discretionary expenditures. Currently, over 90% of the Company’s revenues come from tenants who provide these essential products and services, including grocery stores, pharmacies, liquor stores, banks, restaurants, cafés, fitness centres, medical, childcare facilities and other professional and personal services. Management looks to implement a specific complementary tenant offering at each of its properties to best serve the needs of the local community. The Company is highly focused on ensuring the competitive position of its assets in their respective urban and retail trade areas and closely follows demographic profiles and shopping trends that may impact the performance of its properties. In Management’s view, shopping centres, including mixed-use properties with a meaningful retail component, located in urban markets with tenants who primarily provide non-discretionary goods and services, will be less sensitive to both economic cycles and changing retail trends, thus adding to the stability and growth of cash flow over the long term. FIRST CAPITAL REALTY ANNUAL REPORT 2016 2 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Shopping for Everyday Life® 3 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Urban Focus The Company targets specific urban markets in Canada with stable and/or growing populations. Specifically, the Company intends to continue to operate primarily in and around its target urban markets which include the Greater Toronto Area (including the Golden Horseshoe Area and London); Greater Calgary Area; Greater Edmonton Area; Greater Vancouver Area (including Vancouver Island); Greater Montreal Area; Greater Ottawa Area (including Gatineau region); and Quebec City. Over 95% of the Company’s annual minimum rent is derived from these markets. The Company has achieved critical mass in its target markets, which helps generate economies of scale and operating synergies, as well as deep local knowledge of its properties, tenants, neighbourhoods and markets in which it operates. Within each of these markets, the Company owns and targets well-located properties with strong demographics that Management expects will continue to get stronger over time, therefore attracting high quality tenants with rent growth potential. Real Estate Investments Acquisitions Management seeks to acquire well-located, high quality retail properties and sites in the Company’s target urban markets. These properties are acquired when they complement or add value to the existing portfolio or provide opportunity for redevelopment or repositioning. Once the Company has acquired a property in a specific retail trade area, Management will look to acquire properties in close proximity. These properties allow the Company to provide maximum flexibility to its tenant base to meet changing formats and size requirements over the long term. Adjacent properties also allow the Company to expand or intensify its existing property. They also provide more flexibility to offer the appropriate merchandising mix, providing a better overall retail product and service offering for consumers in the property's trade area. Management believes that its adjacent site acquisitions result in a stronger retail offering and, ultimately, a better long-term return on investment, with a lower level of risk. Through acquisitions, the Company expands its presence in its target urban markets in Canada, and continues to generate greater economies of scale and leasing and operating synergies. Management will continue to look for strategic acquisitions, in both existing markets and strong trade areas within its existing urban markets where the Company does not yet have a presence. Dispositions The Company also recycles its capital to fund new investments by selling assets in certain markets that are no longer aligned with its core strategy. Development, Redevelopment and Land Use Intensification The Company pursues selective development and redevelopment activities including land use intensification projects, primarily on its own, but also with partners. Redevelopment activities are focused primarily on older, well-located shopping centres that the Company owns. These properties are redeveloped and expanded over time in conjunction with anchor tenant repositioning and changing retail environments. Redevelopment of existing properties generally carries a lower market risk due to the urban locations in which they are situated, an existing tenant base and the ability to increase density through land use intensification. Redevelopment projects are carefully managed to minimize tenant downtime. FIRST CAPITAL REALTY ANNUAL REPORT 2016 4 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued When possible, tenants continue to operate during the planning, zoning and leasing phases of the project with modest “holdover” income from tenants operating during this period. The Company will sometimes carry vacant space in a property for a planned future expansion of tenants or reconfiguration of a property. Management believes that the Company’s shopping centres, along with its portfolio of adjacent sites, give it a unique opportunity to participate in urban land use intensification in its various markets. The land use intensification trend in the Company’s target urban markets is driven by the costs for municipalities to expand infrastructure beyond existing urban boundaries, the desire by municipalities to increase their tax base, environmental considerations and the migration of people to vibrant urban centres, a secular trend that is occurring in most major cities around the world. The Company’s land use intensification activities are focused primarily on increasing retail space on a property and, to a lesser degree, adding mixed-use density, including residential and office space. The Company has proven development and redevelopment capabilities across the country to enable it to capitalize on these opportunities and expects these land use intensification activities to increase over the next several years. To a lesser degree, the Company develops new properties on ground-up sites. Investments in redevelopment and development projects are generally less than 10% of the Company’s total assets (at invested cost) at any given time. Development activities are strategically managed to reduce leasing risks by obtaining lease commitments from anchor and major tenants prior to commencing construction. The Company also uses experts including architects, engineers and urban planning consultants, and negotiates competitive fixed-price construction contracts. These development and land use intensification activities provide the Company with an opportunity to use its existing platform to sustain and increase cash flow and realize capital appreciation over the long term. Proactive Management The Company views proactive management of its portfolio as a core competency and an important part of its strategy. Proactive management means the Company continues to invest in properties to ensure that they remain competitive by attracting high quality retail tenants and their customers over the long term. Specifically, Management strives to create and maintain the highest standards in lighting, parking, access and general appearance of the Company’s properties. The Company’s proactive management strategies have historically contributed to improvements in occupancy levels and average lease rates throughout the portfolio. The Company is fully internalized and all value creation activities, including development management, leasing, property management, lease administration, legal, construction management and tenant co-ordination functions, are directly managed and executed by experienced real estate professionals employed by the Company. The Company's executive leadership team is centralized at the Company’s head office location in Toronto, which ensures that best practices, procedures and standards are applied consistently across the Company's operating markets. Property management and operations are executed through local operating platforms in all major urban markets. Real estate acquisitions, development and redevelopment, leasing, and construction are executed through local teams located in the Company’s offices in Toronto, Montreal, and Calgary in order to effectively serve the major urban markets where First Capital Realty operates. In addition, the Company’s management team possesses significant retail experience, which contributes to the Company’s in-depth knowledge of its tenants and market trends. Cost of Capital The Company seeks to maintain financial strength and flexibility in order to achieve a competitive cost of debt and equity capital over the long term. The Company’s capital structure is key to financing growth and providing sustainable cash dividends to its shareholders. In the real estate industry, financial leverage is used to enhance rates of return on invested capital. Management believes that First Capital Realty’s capital structure composition of senior unsecured debt, mortgage debt, revolving credit facilities, bank indebtedness, convertible debentures and equity provides financing flexibility and reduces risks, while generating an attractive risk-adjusted return on investment, taking into account the long-term business strategy of the Company. The Company also recycles capital through the selective disposition of full or partial interests in properties. When it is deemed appropriate, the Company will raise equity to finance its growth and strengthen its financial position. 5 FIRST CAPITAL REALTY ANNUAL REPORT 2016 DBRS Limited (“DBRS”) has rated the Company’s senior unsecured debentures as BBB (high), and Moody's has rated these debentures as Baa2. Management believes that this, along with the quality of the Company’s real estate portfolio and other business attributes, contribute to reducing the Company’s cost of capital. OUTLOOK AND CURRENT BUSINESS ENVIRONMENT Since 2001, First Capital Realty has successfully grown its business across the country, focusing on key urban markets, dramatically enhancing the quality of its portfolio and generating modest accretion in funds from operations, while reducing leverage and achieving an investment grade credit rating. The Company expects to continue to grow its portfolio of high quality properties in urban markets in Canada in line with its long-term value creation strategy. The Company defines a high quality property primarily by its location, taking into consideration the local demographics and the retail supply and demand factors in each property trade area, and the ability to grow the property's cash flow. Changing Consumer Habits The Company continues to observe several demographic and other trends that may affect demand for retail goods and services, including an increasing reliance by consumers on online information to influence their purchasing decisions and an increasing desire to purchase products online, as well as an aging population which is increasingly focused on convenience and health-related goods and services. There is also a shift in consumer demand driven by an increasing number of ethnic consumers as a result of Canada’s immigration policies. Another trend that Management observes is a desire for consumers to live in urban markets and to connect with others through daily or frequent trips to grocery stores, fitness centres, cafés and/or restaurants. Management is proactively responding to these consumer changes through its tenant mix, unit sizes and shopping centre locations and designs. Evolving Retail Landscape Over the past several years, the Company has observed an increase in entry and/or expansion into the Canadian marketplace by several major U.S. and international retailers including Walmart, Marshalls, Nordstrom, Saks Fifth Avenue, Uniqlo and others. Although such repositioning resulted in new opportunities for the Company, it also resulted in an increasingly competitive retail landscape in Canada. In addition, many retailers have announced store closures and/or bankruptcies, including Mexx, Future Shop, Aeropostale, Black's, Nine West, Target, Danier Leather, Le Château and HMV. Although the Company’s exposure to these retailers is limited, these store closures will, in the short term, result in increased availability of retail space across Canada and have the potential to impact retail rental rates and leasing fundamentals. As a result of these ongoing changes, the Company remains highly focused on ensuring the competitive position of its shopping centres in all of its various retail trade areas. Management will continue to closely follow demographic and shopping trends, as well as retailer responses to these trends, and retail competition. The Company’s leasing strategy takes these factors into consideration in each trade area and its proactive management strategy helps to ensure the Company’s properties remain attractive to high quality tenants and their customers. In Management’s view, shopping centres and mixed-use properties located in urban markets with tenants providing non- discretionary goods and services, will be less sensitive to both economic cycles and evolving retail trends, thus providing more stable and growing cash flow over the long term. Growth For the year ended December 31, 2016, the Same Property portfolio delivered net operating income growth of 2.0% compared to the prior year excluding the effect of two significant lease surrender fees earned in the second quarter of 2015 (1.1% including the impact of these fees). The growth in Same Property net operating income was primarily due to rental rate step-ups and lease renewals at higher rates. Total portfolio occupancy improved to 95.0% as at December 31, 2016, from 94.8% as at December 31, 2015 primarily due to re-leasing a portion of the space vacated by the closure of two Target stores in the second quarter of 2015 and a Canadian Tire store in the third quarter of 2015. Urban municipalities where the Company operates continue to focus on increasing density within the existing boundaries of infrastructure. This provides the Company with multiple development and redevelopment opportunities in its existing FIRST CAPITAL REALTY ANNUAL REPORT 2016 6 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued portfolio of urban properties, which includes an inventory of adjacent land sites and development land. As at December 31, 2016, the Company had identified approximately 13.8 million square feet of incremental density available in the portfolio for future development (including 3.0 million square feet of retail and 10.9 million square feet of residential space), of which approximately 0.5 million square feet of development projects are currently underway. Development activities continue to provide the Company with growth within its existing portfolio of assets. These activities typically improve the quality of the property, which in turn leads to meaningful growth in property rental income. The Company’s development activities primarily comprise redevelopments and expansions of existing properties in established retail trade areas in urban markets. These projects typically carry risk that is associated more with project execution rather than market risk, as projects are located in well-established urban communities with existing demand for goods and services. The Company has a long and successful track record of development activities and will continue to manage carefully the risks associated with such projects. During the year, the Company transferred 288,000 square feet of new urban retail space from development to income- producing properties at a cost of $165.3 million. Approximately 264,000 square feet of the new space was occupied at an average net rental rate of $31.96 per square foot, well above the average rent for the entire portfolio of $19.39, thus realizing on the growth potential through development and redevelopment activities. Transaction Activity The property acquisition environment remains extremely competitive for assets of similar quality to those owned by the Company. There are typically multiple bids on high quality properties and asset valuations reflect strong demand for well- located income-producing assets. In addition, well-located urban properties rarely trade in the market and attract significant competition when they do. As a result, the urban property acquisitions completed by the Company typically do not provide material accretion to the Company’s results in the immediate term. However, the Company will continue to selectively acquire high quality, well-located properties that add strategic value and/or operating synergies, provided that they will be accretive to Operating FFO over the long term. Therefore, the Company expects to focus on development and redevelopment of existing assets as the primary means to grow the portfolio while continuing to make selective acquisitions that complement the existing portfolio. During the year, the Company acquired nine income-producing properties for $268.5 million in close proximity to the Company's existing shopping centres, adding a total of 621,400 square feet of gross leasable area to the portfolio. The Company also acquired four development properties for $51.7 million, including a 50% interest in the former Christie Cookie site comprising 27 acres of prime land in the southwest part of Toronto. Additionally, the Company invested $145.9 million in development and redevelopment activities during the year. In the third quarter of 2016, the Company advanced $189.2 million as a deposit on the acquisition of an investment property, located at One Bloor Street in Toronto, that is currently under construction. The deposit earns interest of 4.5% until the purchase closing date which is estimated to be in the fourth quarter of 2017. The Company continues to evaluate its properties and will occasionally dispose of non-core properties. This allows the Company to redeploy capital into its core urban redevelopment projects where population, rent growth and consumer trends present the opportunity for better long-term growth. During the year, the Company disposed of six properties and four land parcels for gross proceeds of $137.1 million. Financing Activity During the year, the Company repaid $155.6 million of mortgages with a weighted average effective interest rate of 4.0% and secured $203.4 million of new mortgages with a weighted average effective interest rate of 3.2% and a weighted average term of 10.1 years. In April 2016, the Company redeemed its remaining 5.25% Series G and 4.95% Series H convertible debentures at par and satisfied its principal and accrued interest owing on each series 50% by the issuance of common shares and 50% in cash. In May 2016, the Company completed the issuance of a $150.0 million principal amount of Series T senior unsecured debentures. The debentures have an effective interest rate of 3.7%, and mature on May 6, 2026 which represented a term 7 FIRST CAPITAL REALTY ANNUAL REPORT 2016 to maturity of 10.0 years at the time of issuance. Subsequently, in September 2016, the Company completed the issuance of an additional $150.0 million, which was a re-opening of the series T debentures, with an effective interest rate of 3.4%. In May 2016, the Company also issued 5.5 million common shares at a price of $21.10 for gross proceeds of $115.0 million. In August 2016, the Company issued an additional 7.6 million common shares at a price of $22.60 for gross proceeds of $172.6 million. The proceeds raised in the debt and equity offerings were primarily used to fund investment activities. Outlook Management is focused on the following five areas to achieve its objectives through 2017 and into 2018: • development, redevelopment and repositioning activities including land use intensification; • selective acquisitions of strategic assets and sites in close proximity to existing properties in the Company’s target urban markets; • proactive portfolio management that results in higher rent growth; • increasing the efficiency and productivity of operations; and • maintain financial strength and flexibility to achieve a competitive cost of capital over the long-term. Overall, Management is confident that the quality of the Company’s balance sheet and the defensive nature of its assets will continue to serve it well in the current environment and into the future. CORPORATE RESPONSIBILITY AND SUSTAINABILITY The Company builds value by creating and managing high quality properties with long-term appeal in neighbourhoods and communities that the Company believes will have a good and growing customer base well into the future. The Company also takes a highly disciplined approach to the development and redevelopment of the Company’s properties across Canada. In 2006, the Company embarked on the path towards sustainability with a commitment to build all new developments to Leadership in Energy and Environmental Design ("LEED") standards subject to tenant acceptance. In 2009, the Company published its first Corporate Sustainability Report identifying five long-term goals. Since 2011, the Company has published annual Corporate Responsibility and Sustainability ("CRS") Reports. These CRS reports comply with the Global Reporting Initiative ("GRI"), an international non-profit organization whose mandate is to establish guidelines for CRS reports. The Company is proud to be Canada's first publicly traded real estate company to have issued a GRI-compliant and externally assured CRS report. In March 2016, the Company was named by Corporate Knights as one of the Future 40 Responsible Corporate Leaders in Canada. This ranking evaluated all Canadian companies with revenues of under $2.0 billion dollars or maintaining fewer than 2,000 employees in 2015 for their sustainability and disclosure practices. In June 2016, the Company responded to the 2015 Carbon Disclosure Project Information Request, disclosing information on the Company’s greenhouse gas emissions, energy use, and risks and opportunities from climate change. On the environmental front, the Company continues to develop its properties to LEED standards subject to tenant acceptance. As at December 31, 2016, 114 projects comprising 3.4 million square feet of GLA were certified to LEED standards. Another 31 projects comprising 1.3 million square feet of GLA are registered for LEED certification. Reducing energy and water consumption is also a key part of the sustainability program, and the Company continues to implement energy and water conservation measures, such as retrofitting lighting and water fixtures to more efficient technology. All of these initiatives enhance the properties’ environmental performance and many of them reduce operating costs, benefiting the Company's tenants and shareholders. Management strives to maintain the highest levels of integrity and ethical business practices in all that it does. The Company’s governance structure, Code of Conduct and Ethics, and all of its employee guidelines and policies are aimed at ensuring that all employees remain good corporate citizens focused on building the long-term value of the Company. For more information on the Company’s Corporate Responsibility and Sustainability practices, refer to the latest CRS report on the Company's website at www.fcr.ca. FIRST CAPITAL REALTY ANNUAL REPORT 2016 8 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued SUMMARY CONSOLIDATED INFORMATION AND HIGHLIGHTS As at December 31 Operations Information Number of properties GLA (square feet) – at 100% Occupancy – Same Property – stable (1) Total portfolio occupancy Development pipeline and adjacent land (GLA) (2) Retail pipeline Residential pipeline (3) Average rate per occupied square foot GLA developed and brought online – at 100% Same Property – stable NOI – increase over prior year (1) (4) Total Same Property NOI – increase over prior year (1) (4) Financial Information Investment properties – shopping centres (5) Investment properties – development land (5) Total assets Mortgages (5) Credit facilities Senior unsecured debentures Convertible debentures Shareholders’ equity Capitalization and Leverage 2016 2015 2014 160 25,278,000 158 24,431,000 158 24,331,000 96.4% 95.0% 96.3% 94.8% 96.8% 96.0% 2,993,000 10,856,000 19.39 288,000 $ 3,326,000 10,612,000 18.84 248,000 $ 2,421,000 N/A 18.42 289,000 $ 0.8% 1.1% 4.1% 3.7% 2.8% 3.2% $ 8,453,348 $ 67,149 $ 9,104,553 997,165 $ $ 251,481 $ 2,546,442 $ 207,633 $ 4,195,263 $ 7,870,719 $ 36,353 $ 8,278,526 $ 1,024,002 $ 224,635 $ 2,244,091 $ 327,343 $ 3,639,952 $ 7,474,329 $ 35,462 $ 7,908,184 $ 1,165,625 $ 7,785 $ 2,149,174 $ 373,277 $ 3,470,271 Shares outstanding (in thousands) Enterprise value (6) Net debt to total assets (6) (7) (8) Weighted average term to maturity on mortgages and senior unsecured debentures (years) 243,507 $ 9,162,000 225,538 $ 8,031,000 216,374 $ 7,762,000 42.6% 5.3 42.9% 5.5 42.2% 5.9 9 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Year ended December 31 2016 2015 2014 Revenues, Income and Cash Flows Revenues and other income (9) Net operating income (“NOI”) (9) (10) Increase (decrease) in value of investment properties, net (9) Net income attributable to common shareholders Net income per share attributable to common shareholders (diluted) Cash provided by operating activities Adjusted cash flow from operating activities (6) Dividends Dividends Dividends per common share Weighted average number of common shares – diluted (in thousands) Funds from Operations (“FFO”) (10) Operating FFO (10) Operating FFO per diluted share Operating FFO payout ratio FFO FFO per diluted share FFO payout ratio Adjusted Funds from Operations (“AFFO”) (10) Operating AFFO (10) Operating AFFO per diluted share Operating AFFO payout ratio AFFO AFFO per diluted share AFFO payout ratio $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 695,925 421,997 218,078 382,714 1.59 256,598 265,304 204,233 0.86 246,428 260,731 1.10 78.2% 262,544 1.11 77.5% 260,977 1.07 80.4% 264,869 1.08 79.6% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 672,494 409,892 37,773 203,865 0.91 244,433 243,922 192,781 0.86 235,870 236,069 1.05 81.9% 221,265 0.99 86.9% 242,808 1.02 84.3% 243,592 1.03 83.5% 661,438 403,548 42,078 196,748 0.92 271,861 236,293 181,317 0.85 230,533 220,299 1.04 81.7% 208,977 0.98 86.7% 228,617 1.00 85.0% 229,770 1.01 84.2% (1) Same Property – stable NOI and Total Same Property NOI are measures of operating performance not defined by International Financial Reporting Standards ("IFRS"). Refer to the “Business and Operations Review – Real Estate Investments – Investment Property Categories” section of this MD&A. (2) At the Company's proportionate interest. Square footage does not include potential development on properties held by the Company’s Main and Main Developments LP ("Main and Main Developments") joint venture. Refer to the “Business and Operations Review – Properties Under Development – Main and Main Developments” section of this MD&A. (3) 2014 amount has not been disclosed. (4) Calculated based on the year-to-date NOI. (5) Includes properties and mortgages classified as held for sale. (6) Enterprise value, Net debt to total assets and Adjusted cash flow from operating activities are measures not defined by IFRS. Refer to the “Capital Structure and Liquidity – Total Capital Employed” section of this MD&A. (7) Calculated with joint ventures accounted for on the equity basis under IFRS, proportionately consolidated. (8) Calculated net of cash balances as at the end of the period. (9) Calculated excluding the Company’s proportionate share of joint ventures accounted for on an equity basis under IFRS. (10) NOI, FFO, Operating FFO, AFFO and Operating AFFO are measures of operating performance not defined by IFRS. Refer to the “Results of Operations – Net Operating Income" and “Results of Operations – Non-IFRS Supplemental Financial Measures” sections of this MD&A. FIRST CAPITAL REALTY ANNUAL REPORT 2016 10 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued BUSINESS AND OPERATIONS REVIEW Real Estate Investments Investment Property Categories The Company categorizes its properties for the purposes of evaluating operating performance including Same Property NOI. This enables the Company to better reflect its development, redevelopment and repositioning activities on its properties, including land use intensification, and its completed and planned disposition activities. In addition, the Company revises comparative information to reflect property categories consistent with current period status. The property categories are as follows: Investment properties – shopping centres – Same Property consisting of: Same Property – stable – includes stable properties where the only significant activities are leasing and ongoing maintenance. Properties that will be undergoing a redevelopment in a future period, including adjacent parcels of land, and those having planning activities underway are also in this category until such development activities commence. At that time, the property will be reclassified to either Same Property with redevelopment or to major redevelopment. Same Property with redevelopment – includes properties that are largely stable, including adjacent parcels of land, but are undergoing incremental redevelopment or expansion activities (pads or building extensions) which intensify the land use. Such redevelopment activities often include façade, parking, lighting and building upgrades. Major redevelopment – includes properties in planning or undergoing multi-year redevelopment projects with significant intensification, reconfiguration and building and tenant upgrades. Ground-up development – consists of new construction, either on a vacant land parcel typically situated in an urban area or on an urban land site with conversion of an existing vacant building to retail use. Acquisitions and dispositions – consists of properties acquired during the period including those in close proximity to existing shopping centres. Dispositions include information for properties disposed of in the period. Investment properties classified as held for sale – consists of properties that meet the held for sale criteria under IFRS. Investment properties – development land – comprises land sites where there are no development activities underway, except for those in the planning stage. The Company has applied the above property categorization to the fair value, capital expenditures as well as leasing and occupancy activity on its shopping centre portfolio, and to its Same Property NOI analysis to further assist in understanding the Company’s real estate activities and its operating and financial performance. 11 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Reconciliation of Consolidated Balance Sheets to the Company's Proportionate Interest Proportionate interest is not an IFRS measure, but is defined by Management as the Company’s proportionate share of revenues, expenses, assets and liabilities in all of its real estate investments. This presentation is reflected throughout this MD&A to include the Company’s two equity accounted joint ventures, net of non-controlling interests, and its share of revenues, expenses, assets and liabilities at the Company’s ownership interest. Management presents the proportionate share of the Company's interests in its two joint ventures in the determination of many key performance measures. Management views this method as relevant in demonstrating the Company's ability to manage and monitor the underlying financial performance and cash flows of the related investments. This presentation also depicts the extent to which the underlying assets are leveraged, which are included in the Company's debt metrics. The following table provides a reconciliation of the Company’s consolidated balance sheets, as presented in its audited annual consolidated financial statements to its proportionate interest. As at ASSETS Investment properties – shopping centres Investment properties – development land Investment in joint ventures Investment properties classified as held for sale Other Total assets LIABILITIES Mortgages Credit facilities Other Total liabilities EQUITY Shareholders' equity Non-controlling interest Total equity Total liabilities and equity December 31, 2016 December 31, 2015 Consolidated Balance Sheet (1) Adjustments for Proportionate Interest Proportionate Interest Proportionate Interest $ $ $ 8,370,298 67,149 146,422 83,050 437,634 9,104,553 997,165 251,481 3,622,824 4,871,470 4,195,263 37,820 4,233,083 $ $ $ 111,087 88,878 (146,422) — 12,596 66,139 45,373 56,798 1,788 103,959 — (37,820) (37,820) $ $ $ 8,481,385 156,027 — 83,050 450,230 9,170,692 1,042,538 308,279 3,624,612 4,975,429 4,195,263 — 4,195,263 $ $ $ 7,884,623 80,555 — 97,737 221,391 8,284,306 1,026,664 255,588 3,362,102 4,644,354 3,639,952 — 3,639,952 $ 9,104,553 $ 66,139 $ 9,170,692 $ 8,284,306 (1) Certain assets and liabilities have been grouped for purposes of this reconciliation. FIRST CAPITAL REALTY ANNUAL REPORT 2016 12 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Portfolio Overview As at December 31, 2016, the Company had interests in 160 investment properties – shopping centres, which were 95.0% occupied with a total GLA of 25.3 million square feet and a fair value of $8.6 billion. This compares to 158 investment properties – shopping centres, which were 94.8% occupied with a total GLA of 24.4 million square feet and a fair value of $8.0 billion as at December 31, 2015. As at December 31, 2016, the average size of the shopping centres is approximately 158,000 square feet, ranging from approximately 9,200 to over 574,000 square feet. The Same Property portfolio includes shopping centres sub-categorized in Same Property – stable and Same Property with redevelopment. The Same Property portfolio is comprised of 143 properties with a GLA of 21.3 million square feet and a fair value of $6.7 billion. These properties represent 89.4% of the Company's property count, 84.4% of its GLA and 78.4% of its fair value and generated $360.1 million in NOI for the year ended December 31, 2016 or 84.3% of the Company's total NOI. The balance of the Company’s real estate assets consists of shopping centres with significant value enhancement opportunities which are in various stages of redevelopment, shopping centres acquired in 2016 or 2015 and properties in close proximity to them, as well as properties held for sale. The Company's shopping centre portfolio based on property categorization is summarized as follows: As at December 31, 2016 December 31, 2015 (millions of dollars, except other data) Number of Properties GLA (000s sq. ft.) Fair Value (1) Occupancy Number of Properties GLA (000s sq. ft.) Fair Value (1) Occupancy Weighted Average Rate per Occupied Square Foot 96.4% $ 18.84 19.51 95.4% 96.3% 83.4% 96.9% 91.3% 87.1% 88.0% 18.93 23.08 21.93 20.16 36.42 17.59 Weighted Average Rate per Occupied Square Foot 96.3% $ 18.61 18.69 93.6% 96.0% 83.6% 93.2% —% 87.1% 88.2% 18.62 22.95 17.84 — 35.99 17.32 129 14 143 8 3 — — 2 18,454 $ 5,623 782 2,830 21,284 1,933 601 — 98 293 6,405 930 308 — 129 79 Same Property – stable Same Property with redevelopment Total Same Property Major redevelopment Ground-up development Acquisitions – 2016 (2) Acquisitions – 2015 Investment properties classified as held for sale (3) Dispositions – 2016 129 14 143 8 3 4 — 2 — 18,454 $ 5,857 854 2,890 21,344 1,939 767 835 98 295 6,711 1,004 358 283 125 83 — — —% — 2 222 125 96.4% 6.91 Total 160 25,278 $ 8,564 95.0% $ 19.39 158 24,431 $ 7,976 94.8% $ 18.84 (1) At the Company's proportionate interest. (2) (3) Properties in close proximity to existing properties. The number of properties and GLA exclude a shopping centre that was 50% held for sale as at December 31, 2015. The GLA and property count for this shopping centre was included in Same Property with redevelopment. 2015 fair value excludes development land held for sale of $6.5 million. 13 FIRST CAPITAL REALTY ANNUAL REPORT 2016 The Company’s shopping centre portfolio by geographic region is summarized as follows: As at (millions of dollars, except other data) Central Region Greater Toronto Area Number of Properties GLA (000s sq. ft.) Fair Value (1) Occupancy December 31, 2016 Weighted Average Rate per Occupied Square Foot % of Annual Minimum Rent December 31, 2015 Number of Properties GLA (000s sq. ft.) Fair Value (1) Occupancy Weighted Average Rate per Occupied Square Foot % of Annual Minimum Rent 46 7,111 $ 3,134 96.2% $ 21.92 33% 44 6,601 $ 2,825 96.4% $ 21.96 33% Golden Horseshoe 8 1,569 405 95.7% 15.94 6% 8 1,570 383 97.1% 15.64 6% Area London Area Eastern Region Greater Montreal Area Greater Ottawa Area Quebec City Other Western Region Greater Calgary Area Greater Vancouver Area Greater Edmonton Area Red Deer 7 61 784 9,464 173 3,712 93.7% 95.9% 15.17 20.39 3% 42% 7 59 777 8,948 163 3,371 96.3% 14.82 96.5% 20.23 3% 42% 32 4,782 1,189 90.8% 16.41 15% 34 4,891 1,199 90.8% 15.33 16% 11 1,994 473 97.1% 17.11 6% 11 1,990 465 95.9% 16.72 6% 5 2 50 1,011 220 8,007 175 44 1,881 93.6% 99.2% 93.0% 11.19 13.78 15.85 2% 1% 24% 5 2 52 1,011 215 8,107 175 37 1,876 95.6% 10.82 100.0% 12.94 92.9% 15.04 3% —% 25% 16 2,622 1,041 95.4% 22.89 12% 15 2,553 977 97.6% 22.54 13% 20 2,370 1,054 95.6% 22.59 11% 19 2,177 927 94.5% 22.26 10% 12 2,571 794 97.2% 19.82 10% 12 2,402 752 92.1% 18.91 9% 1 49 244 7,807 82 2,971 93.1% 96.0% 20.25 21.70 1% 34% 1 47 244 7,376 73 2,729 95.2% 20.17 94.8% 21.23 1% 33% Total 160 25,278 $ 8,564 95.0% $ 19.39 100% 158 24,431 $ 7,976 94.8% $ 18.84 100% (1) At the Company's proportionate interest. Among the Company's real estate investment portfolio are thirty-four (2015 - twenty-nine) retail assets each with a value greater than $85 million or size greater than 300,000 square feet. Together, these thirty-four retail assets comprise $4.2 billion (2015 - $3.7 billion) or 49% (2015 - 46%) of the Company's aggregate $8.6 billion value (2015 - $8.0 billion). These assets, as a percentage of the Company's aggregate value, reflects the Company's focus on larger, but fewer strategic assets in its target urban markets. FIRST CAPITAL REALTY ANNUAL REPORT 2016 14 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Investment Properties – Shopping Centres A continuity of the Company’s proportionate interest in investments in its shopping centre acquisitions, dispositions, development and portfolio improvement activities is as follows: (millions of dollars) Balance at beginning of year Acquisitions Shopping centres and additional adjacent spaces Shopping centres acquired for redevelopment Land parcels in close proximity to existing properties Development activities and property improvements Reclassifications from development land Reclassification to residential development inventory Increase (decrease) in value of investment properties, net Dispositions Other changes Balance at end of year Investment in joint ventures – shopping centres (1) Proportionate interest end of year (2) Year ended December 31 2016 7,871 $ $ 269 17 — 216 — (5) 218 (133) — 8,453 111 8,564 $ $ $ $ 2015 7,474 95 — 1 275 2 — 40 (23) 7 7,871 105 7,976 (1) At the Company's proportionate interest. (2) Includes investment properties classified as held for sale as at December 31, 2016 and 2015 totaling $83 million and $91 million, respectively. 2016 Acquisitions Income-producing properties – Shopping Centres and Additional Adjacent Spaces During the year ended December 31, 2016, the Company acquired nine properties in close proximity to existing shopping centres, as summarized in the table below: Count Property 1. 2. 3. 4. 5. 6. 7. 8. 9. Peninsula Village 225 Peel St. (Griffintown) 816-838 11th Ave. (Glenbow) Yorkville Village adjacent properties Cliffcrest Plaza Whitby Mall Avenue Rd. & Lawrence Ave. assembly 2415-2595 Rue de Salaberry (Galeries Normandie) 338 Wellington Rd. (Wellington Corners) Total (1) At the Company's proportionate interest. City/Province Surrey, BC Montreal, QC Calgary, AB Toronto, ON Toronto, ON Whitby, ON Toronto, ON Montreal, QC London, ON Quarter Acquired Interest Acquired GLA (sq. ft.) (1) Acquisition Cost (in millions) Q1 Q1 Q1 Q1, Q2 Q2 Q2 Q4 Q4 Q4 100% 100% 50% 100% 100% 50% 100% 100% 100% 170,900 $ 108,200 23,800 — 72,400 164,700 61,500 17,100 2,800 621,400 $ 78.5 56.0 10.5 1.8 31.9 18.6 65.2 5.2 0.8 268.5 15 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Development Properties During the year ended December 31, 2016, the Company acquired four development properties, as summarized in the table below: Count Property Name City/Province Quarter Acquired Interest Acquired Acreage(1) Acquisition Cost (in millions) Shopping centres acquired for redevelopment 101 Yorkville Ave. (Yorkville Village) 2520 Chemin Bates (Wilderton) Total shopping centres acquired for redevelopment Toronto, ON Montreal, QC Development lands 1071 King Street West (remaining 50% interest) 2150 Lake Shore Blvd. West (former Christie Cookie Toronto, ON Toronto, ON 1. 2. 1. 2. Q3 Q4 Q1 Q2 50% 100% 50% 50% site) Total development lands Total (1) At the Company's proportionate interest. 2015 Acquisitions 0.5 $ 0.3 0.8 $ 0.3 $ 13.5 13.8 $ 14.6 $ 15.5 1.7 17.2 7.7 26.8 34.5 51.7 Income-producing Properties – Shopping Centres and Additional Adjacent Spaces During the year ended December 31, 2015, the Company acquired ten properties in close proximity to existing shopping centres, as summarized in the table below: Count Property Name City/Province Quarter Acquired Interest Acquired GLA (sq. ft.) (1) Acquisition Cost (in millions) 1. 2. 3. 4. 5. 6. 7. 8. 9. 880-16th Ave., 1508-8th Street (Mount Royal Village) Calgary, AB Yorkville Village adjacent properties 1030 King St. West (Shops at King Liberty) 930, 932-17th Ave. SW (Mount Royal Village) 43 Hanna Ave. (Shops at King Liberty) Toronto, ON Toronto, ON Calgary, AB Toronto, ON 97 McKenzie Town Blvd. (McKenzie Towne Centre) Calgary, AB 850-16th Avenue (Mount Royal Village) Calgary, AB 3270 Rue Langelier (Centre Commercial Domaine) Montreal, QC 1000 Wellington (Griffintown) Montreal, QC 10. 3903-3945, 34 St. NW (Meadowbrook II) (remaining Edmonton, AB Q1 Q1-Q3 Q2 Q2 Q3 Q3 Q3 Q4 Q4 Q4 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 50% interest) Total (1) At the Company's proportionate interest. 42,400 $ — 17,900 9,600 1,200 7,900 10,600 16,600 22,400 14,300 142,900 $ 23.4 2.3 25.7 6.0 0.8 7.5 6.2 2.8 14.3 6.3 95.3 Development Properties During the year ended December 31, 2015, the Company acquired two development properties, as summarized in the table below: Count Property Name City/Province Quarter Acquired Interest Acquired Acreage Acquisition Cost (in millions) 1. 2. 3009 Blvd. St-Charles (Centre Kirkland-St. Charles) 1200 Block of Marine Drive (Pemberton Plaza) Kirkland, QC North Vancouver, BC Q2 Q2 100% 100% Total 0.2 $ — 0.2 $ 0.9 0.5 1.4 FIRST CAPITAL REALTY ANNUAL REPORT 2016 16 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued 2016 Dispositions During the year ended December 31, 2016, the Company disposed of ten properties, three of which were 50% interests and four land parcels, as summarized in the table below: Count Property Name City/Province 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Les Galeries de Lanaudiere 1706-1712 152nd Street Place Kirkland du Barry (adjacent land) Porte de Chateauguay Place Pierre Boucher Thickson Place 3033 Sherbrooke (adjacent land) Carre Normandie Jericho Centre (land) Rutherford Marketplace (adjacent land) Vaughan, ON Total Lachenaie, QC Surrey, BC Kirkland, QC Chateauguay, QC Boucherville, QC Whitby, ON Montreal, QC Montreal, QC Langley, BC (1) At the Company's proportionate interest. 2015 Dispositions Quarter Sold Interest Sold GLA (sq. ft.)(1) Acreage(1) Gross Sales Price (in millions) Q1 Q2 Q2 Q3 Q3 Q3 Q3 Q3 Q4 Q4 50% 100% 100% 100% 100% 50% 100% 100% 100% 50% 269,500 4,700 — 132,400 78,400 52,400 — 6,000 — — 543,400 30.5 0.2 0.8 10.5 9.0 5.4 1.5 0.3 4.8 1.3 64.3 $ 137.1 During the year ended December 31, 2015, the Company disposed of three properties, as summarized in the table below: Count Property Name 1. 2. 3. Plaza Delson 717 Hillsdale Ave. 497-501 Wellington Rd. Total City/Province Delson, QC Toronto, ON London, ON Quarter Sold Interest Sold Q1 Q2 Q3 100% 100% 100% GLA (square feet) 136,700 — — 136,700 Acreage Gross Sales Price (in millions) — 0.1 0.6 0.7 $ 23.1 Impact of Acquisitions and Dispositions The annualized NOI of properties acquired and disposed, at the time of acquisition or disposition, during the years ended December 31, 2016 and 2015 is summarized in the table below: For the year ended December 31 Central Region Eastern Region Western Region Total Capital Expenditures Acquired Disposed 2016 6,081 2,693 4,516 13,290 $ $ 2015 902 615 2,340 3,857 $ $ 2016 1,040 5,181 66 6,287 $ $ 2015 — 1,510 — 1,510 $ $ Capital expenditures are incurred by the Company for maintaining and/or renovating its existing shopping centres. In addition, the Company also incurs expenditures for the purposes of expansion, redevelopment and development activities. Revenue sustaining capital expenditures are required for maintaining the Company’s shopping centre infrastructure and revenues from leasing of existing space. Revenue sustaining capital expenditures are generally not recoverable from tenants. However, certain leases provide the ability to recover from tenants, over time, a portion of capital expenditures 17 FIRST CAPITAL REALTY ANNUAL REPORT 2016 to maintain the physical aspects of the Company’s shopping centres. Revenue sustaining capital expenditures generally include tenant improvement costs related to new and renewal leasing, and capital expenditures required to maintain the physical aspects of the shopping centres, such as roof replacements and resurfacing of parking lots. Revenue enhancing capital expenditures are those expenditures that increase the revenue generating ability of the Company’s shopping centres. Revenue enhancing capital expenditures are incurred in conjunction with or in contemplation of a development or redevelopment strategy, a strategic repositioning after an acquisition, or in advance of a planned disposition to maximize the potential sale price. The Company owns and actively seeks to acquire older, well- located shopping centres in urban locations, where expenditures tend to be higher when they are subsequently repaired or redeveloped to meet the Company’s standards. The Company also considers property age, the potential effects on occupancy and future rent per square foot, the time leasable space has been vacant and other factors when assessing whether a capital expenditure is revenue enhancing or sustaining. Capital expenditures incurred in development and redevelopment projects include pre-development costs, direct construction costs, leasing costs, tenant improvements, borrowing costs, and overhead including applicable salaries and other direct costs of internal staff directly attributable to the projects under active development. Capital expenditures on investment properties by type and property category are summarized in the table below: Year ended December 31 Revenue sustaining Revenue enhancing Expenditures recoverable from tenants Development expenditures Total Total Same Property Other Property Categories 13,915 $ 33,332 10,048 22,116 79,411 $ — $ 10,956 4,009 123,742 138,707 $ $ $ 2016 Total 13,915 $ 44,288 14,057 145,858 218,118 $ 2015 Total 18,394 46,875 10,268 200,439 275,976 During the year ended December 31, 2016, capital expenditures totaled $218.1 million compared to $276.0 million for the prior year. The $57.9 million decrease was primarily the result of lower development expenditures related to the large ground-up and major redevelopment projects currently underway including Yorkville Village, King High Line and The Edmonton Brewery District. In addition, revenue sustaining expenditures decreased by $4.5 million over the prior year primarily as a result of a major infrastructure project that was undertaken and completed in 2015. Valuation of Investment Properties During the year ended December 31, 2016, the weighted average stabilized capitalization rate of the Company’s investment property portfolio decreased from 5.7% as at December 31, 2015 to 5.5%, primarily due to overall compression in capitalization rates and the impact of acquisitions during the period. The Company’s proportionate interest in the net increase in value of investment properties was $222.9 million for the year ended December 31, 2016. The values of the Company’s proportionate interest in its shopping centres and associated capitalization rates by region were as follows as at December 31, 2016 and December 31, 2015: As at December 31, 2016 (millions of dollars) Central Region Eastern Region Western Region Total or Weighted Average Capitalization Rate Number of Properties Weighted Average 61 50 49 160 5.3% 5.9% 5.3% 5.5% Median Range Fair Value 5.5% 6.0% 5.5% 5.8% 4.1%-7.0% $ 5.0%-7.0% 4.3%-6.5% 4.1%-7.0% $ 3,712 1,881 2,971 8,564 FIRST CAPITAL REALTY ANNUAL REPORT 2016 18 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued As at December 31, 2015 (millions of dollars) Central Region Eastern Region Western Region Total or Weighted Average Properties Under Development Capitalization Rate Number of Properties Weighted Average 59 52 47 158 5.5% 6.1% 5.5% 5.7% Median Range Fair Value 5.8% 6.0% 5.8% 5.8% 4.5%-7.5% $ 5.3%-7.5% 4.5%-6.5% 4.5%-7.5% $ 3,371 1,876 2,729 7,976 Development and redevelopment activities are completed selectively, based on opportunities in the Company’s properties or in the markets where the Company operates. The Company’s development activities include redevelopment on stable properties, major redevelopment, and ground-up projects. Additionally, properties under development include land with future development potential. All development activities are strategically managed to reduce risk, and properties are generally developed after obtaining anchor tenant lease commitments. Individual buildings within a development are generally constructed only after obtaining commitments on a substantial portion of the space. Development Pipeline The Company has identified approximately 13.8 million square feet of incremental density available in the portfolio for future development of which 0.5 million square feet is currently under development. A breakdown of the active development and incremental density within the portfolio by component and type is as follows: As at December 31, 2016 Active Development Same Property with redevelopment Major redevelopment Ground-up development Future uncommitted incremental density Medium term Long term Total development pipeline (1) At the Company's proportionate interest. Square feet (in thousands) (1) Retail Residential 42 223 128 393 1,500 1,100 2,600 2,993 — — 156 156 5,700 5,000 10,700 10,856 Total 42 223 284 549 7,200 6,100 13,300 13,849 The Company determines its course of action with respect to the 10.7 million square feet of uncommitted potential residential density on a case by case basis given the specifics of each property. The Company’s course of action for each property may include selling the property, selling the residential density rights, entering into a joint venture with a partner to develop the property or undertaking the development of the property on its own. The majority of this density is expected to commence development over the medium term (within approximately seven years). In addition to the Company's development pipeline, information regarding the development potential of the Company's Main and Main Developments joint venture can be found in the "Main and Main Developments" section of this MD&A. 19 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Invested Cost of Properties Under Development As at December 31, 2016, the Company had $541.0 million of properties under development and development land parcels at invested cost, representing approximately 6.2% of the value of the total portfolio. A breakdown of invested cost on development activities is as follows: As at December 31, 2016 Same Property with redevelopment Major redevelopment Ground-up development Total development and redevelopment activities Total development land and adjacent land parcels Total Number of Projects Square Feet (1) (2) (in thousands) Active Development Pre- Development Invested Cost (in millions) (3) 3 3 2 8 42 $ 10 $ — $ 223 568 144 121 833 $ 275 $ $ $ 100 — 100 $ 166 $ 266 $ Total 10 244 121 375 166 541 (1) Includes 312,000 square feet of residential rental apartments. (2) Square footage relates to active development only and represents 100% of the space under development. (3) At the Company's proportionate interest. 2016 Development and Redevelopment Coming Online and Space Going Offline Development and redevelopment coming online includes both leased and unleased space transferred from development to income-producing properties at completion of construction. During the year ended December 31, 2016, the Company completed the transfer of 288,000 square feet of new urban retail space from development to the income-producing portfolio at a cost of $165.3 million. Of the space transfered, 264,000 square feet became occupied at an average rental rate of $31.96 per square foot, well above the average rate for the portfolio of $19.39, thus realizing on the growth potential through development and redevelopment activities. The remainder of the space transferred is expected to be leased in the next 12 months. In addition, the Company transferred $24.0 million of space from development to income producing property related to Yorkville Village for which the Company did not attribute any GLA. The Company expects to earn ancillary revenue from these common areas, through several initiatives, including kiosks, pop-up shops and events held in this space. Included in this space is "The Lane" (the new entrance from Yorkville Avenue into the property), the food hall, as well as other common areas. For the year ended December 31, 2016, the Company had tenant closures for redevelopment of 48,000 square feet at an average rental rate of $17.54 per square foot. Of the 48,000 square feet, 22,000 square feet was demolished. Active Development and Redevelopment Activities The Company’s properties with development and redevelopment activities currently in progress are expected to have a weighted average going-in NOI yield of 5.3% upon completion. This yield is derived from the expected going-in run rate based on stabilized leasing and operations following completion of the development, and includes all building cost, land cost, interest and other carrying costs, as well as capitalized staff compensation and other expenses. However, actual rates of return could differ if development costs are higher than current forecasted costs, if final lease terms are lower than forecasted base rent, operating cost or property tax recoveries, or if there are other unforeseen events that cause actual results to differ from assumptions. The quality of the Company’s construction is consistent with its strategy of long-term ownership and value creation, and factors in the Company's high standards in construction, lighting, parking, access, pedestrian amenities, accessibility, as well as development to LEED standards. Development and redevelopment projects may occur in phases with the completed component of the project included in income-producing properties and the incomplete component included in properties under development. The following tables show this split, where applicable, by showing the total invested cost in two categories: under development and income-producing property. In addition, the following tables reflect square footage at 100% of the space under development and invested cost at the Company's proportionate share. FIRST CAPITAL REALTY ANNUAL REPORT 2016 20 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Same Property with Redevelopment The Company currently has three projects under active development in the Same Property with redevelopment property category. Of the approximately 42,000 square feet under active redevelopment, 32,600 square feet is subject to committed leases at a weighted average rate of $30.91 per square foot. The Company is currently in various stages of negotiations for the remaining planned space. Highlights of the Company’s Same Property with redevelopment projects as at December 31, 2016 are as follows: As at December 31, 2016 Count/Project and Major Tenant(s) Active development 1. Kingsway Mews, Edmonton, AB (Freshii) 2. South Park Centre, Edmonton, AB (Boardwalk Fries & Burger) 3. 685 Fairway Road, Kitchener, ON (MEC) Invested Cost (in millions) Square Feet Under Development (in thousands) Target Completion Date (1) Total Estimated incl. Land Under Development Estimated Cost to Complete 5 5 32 42 H1 2017 $ 3 $ 2 $ H1 2017 H1 2018 3 19 — 8 $ 25 $ 10 $ 1 3 11 15 Total Same Property with redevelopment (1) H1 and H2 refer to the first six months of the year and the last six months of the year, respectively. Major Redevelopment The Company has three projects under active development in the major redevelopment property category. Of the approximately 223,400 square feet under active redevelopment, 93,600 square feet is subject to committed leases at a weighted average rate of $33.79 per square foot. As construction on redevelopment projects occurs in phases, there continues to be ongoing negotiations in various stages with certain retailers for the remaining planned retail space. Highlights of the Company’s major redevelopment projects underway as at December 31, 2016, including costs for completed phases, are as follows: As at December 31, 2016 Count / Property and Major Tenant(s) Active development 1. Yorkville Village Assets, Toronto, ON (Whole Foods Market, Equinox Fitness) 2. 3080 Yonge Street, Toronto, ON (Loblaws) 3. Mount Royal West, Calgary, AB (Urban Fare, Canadian Tire) Total Major Redevelopment Square feet (in thousands) Invested Cost (in millions) Planned Upon Completion Completed or Existing (1) Under Development Target Completion Date (2) Total Estimated incl. Land Under Development Income- producing property Estimated Cost to Complete 285 245 93 230 170 — 55 H2 2017 (3) $ 390 $ 70 $ 302 $ 75 H1 2018 121 93 H2 2018 72 41 33 61 — 18 19 39 623 400 223 $ 583 $ 144 $ 363 $ 76 (1) Includes vacant units held for redevelopment. (2) H1 and H2 refer to the first six months of the year and the last six months of the year, respectively. (3) Mall completion is H2 2017; partial redevelopment of street assets is 2018 and beyond. 21 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Ground-up Development The Company has two projects under active development in the ground-up development property category. These projects are comprised of approximately 568,000 square feet of space currently under development, of which 256,000 square feet is retail space and 312,000 square feet is residential rental apartments. A total of 60,900 square feet of the retail space currently under development is subject to committed leases at a weighted average rate of $30.32 per square foot. As construction on ground-up developments occurs in phases, there continues to be ongoing negotiations in various stages with retailers for the remaining planned space. Highlights of the Company’s ground-up projects underway as at December 31, 2016, including costs for completed phases, are as follows: As at December 31, 2016 Count/Project and Major Tenant(s) Active development Square feet (in thousands) Invested Cost (in millions) Planned Upon Completion Completed or Existing Under Development Target Completion Date (3) Total Estimated incl. Land Under Development Income- producing property Estimated Cost to Complete 1. The Brewery District, Edmonton, AB (1) (4) 309 210 99 H2 2017 $ 92 $ 21 $ 62 $ (Loblaws City Market, Shoppers Drug Mart, GoodLife Fitness, MEC, Winners) 2. King High Line (Shops at King Liberty), Toronto, ON (1) (2) Total Ground-up Development 469 778 — 210 469 H2 2018 159 100 — 568 $ 251 $ 121 $ 62 $ 9 59 68 (1) The Company has a 50% ownership interest in the property. (2) The square feet under development comprises 157,000 square feet of retail and 312,000 square feet of residential space. The Company and its development partner have entered into a binding agreement to sell, upon substantial completion, a 1/3 managing interest in the residential component of the property to Canadian Apartment Properties REIT. (3) H1 and H2 refer to the first six months of the year and the last six months of the year, respectively. (4) Target completion date relates to buildings currently under construction. Total estimated costs include buildings not yet started. Other - Current Year Acquisition In addition to the projects listed above, the Company has also commenced a project at Cliffcrest Plaza, a property acquired in the second quarter of 2016. The project is for an 8,000 square foot pad to be occupied by an LCBO for a total cost of approximately $3.4 million. The costs to complete the project are $2.0 million and the project is expected to be completed in the first half of 2017. Costs to Complete Active and Redevelopment Activities Costs to complete the development, redevelopment and expansion activities underway are estimated to be approximately $161 million. Costs to complete Same Property related developments and Cliffcrest Plaza are planned at $17 million. Costs to complete major redevelopments and ground-up developments, are both planned at $50 million each in 2017, and $26 million and $18 million, respectively, thereafter. Main and Main Developments The Company has an interest in a Toronto and Ottawa urban development partnership (known as M+M Urban Realty LP (“Main and Main Urban Realty”)) between the Company, Main and Main Developments (itself, a joint venture between the Company and a private developer) and a prominent Canadian institutional investor. The partners of Main and Main Urban Realty have collectively committed a total of $320.0 million of equity capital for current and future growth and the development of the Main and Main Urban Realty portfolio, of which First Capital Realty’s direct and indirect commitment is approximately $167.0 million (of which $120.3 million has been invested as at December 31, 2016). Main and Main Developments was retained to provide asset and property management services for the real estate portfolio. The Main and Main Developments management team brings a skill set and focus to the assembly and redevelopment of sites that are much smaller than the Company’s typical properties and are normally acquired or assembled via multiple adjacent parcel acquisitions, often from private individuals. Main and Main Developments’ core business strategy is to FIRST CAPITAL REALTY ANNUAL REPORT 2016 22 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued create value in the Main and Main Urban Realty portfolio through the strategic acquisition of assets in under-serviced, transit-oriented urban retail nodes and then reposition, rezone and/or redevelop (including through mixed use development) these assets to their highest and best use, with a view to creating and owning new urban retail formats in high-demand locations. Each of Main and Main Urban Realty’s 22 assembly projects are located on a major street in Toronto or Ottawa. Two projects are in the active development phase and nine projects are in the pre-development planning stage. As at December 31, 2016, the fair value of the Main and Main Urban Realty real estate property portfolio was approximately $366.2 million. Main and Main Urban Realty has identified a total of approximately 1.8 million square feet of additional GLA available in its portfolio, comprised of 0.3 million square feet for future retail and 1.6 million square feet for future residential development. The Company's proportionate interest in Main and Main Urban Realty is 37.7%. Leasing and Occupancy Total Same Property occupancy increased from 96.0% as at December 31, 2015 to 96.3% as at December 31, 2016, primarily as a result of new tenants taking occupancy across the portfolio. Total portfolio occupancy increased from 94.8% as at December 31, 2015 to 95.0% as at December 31, 2016, primarily due to re-leasing a portion of the space vacated by the closure of two Target stores in the second quarter of 2015 and a Canadian Tire store in the third quarter of 2015. Occupancy of the Company's shopping centre portfolio by property categorization was as follows: As at December 31, 2016 December 31, 2015 (square feet in thousands) Same Property – stable Same Property with redevelopment Total Same Property Major redevelopment Ground-up development Investment properties classified as held for sale Total portfolio before acquisitions and dispositions Acquisitions – 2016 Acquisitions – 2015 Dispositions – 2016 Total Total Occupied Square Feet % Occupied Weighted Average Rate per Occupied Square Foot Total Occupied Square Feet Weighted Average Rate per Occupied Square Foot % Occupied 17,794 2,756 20,550 1,616 744 260 23,170 763 86 — 96.4% $ 95.4% 96.3% 83.4% 96.9% 88.0% 95.2% 91.3% 87.1% —% 24,019 95.0% $ 18.84 19.51 18.93 23.08 21.93 17.59 19.30 20.16 36.42 — 19.39 17,777 2,648 20,425 1,615 560 258 22,858 — 85 216 96.3% $ 93.6% 96.0% 83.6% 93.2% 88.2% 94.8% —% 87.1% 96.4% 23,159 94.8% $ 18.61 18.69 18.62 22.95 17.84 17.32 18.89 — 35.99 6.91 18.84 23 FIRST CAPITAL REALTY ANNUAL REPORT 2016 During the three months ended December 31, 2016, the Company achieved an 8.0% overall rate increase per occupied square foot on 635,000 square feet of renewal leases over the expiring lease rates, of which the rate increase for the Same Property portfolio was 8.7% on 585,000 square feet of renewals. The average rental rate per occupied square foot for the total portfolio increased from $19.18 as at September 30, 2016 to $19.39 as at December 31, 2016 primarily due to rent escalations. Management believes that the weighted average rental rate per square foot for the portfolio would be in the range of $25.00 to $27.00, if the portfolio were at market. Changes in the Company’s gross leasable area and occupancy for the total portfolio are set out below: Three months ended December 31, 2016 Total Same Property Major redevelopment, ground-up, acquisitions and dispositions Vacancy Total Portfolio Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Under Redevelop- ment Square Feet (thousands) Vacant Square Feet (thousands) % Total Square Feet (thousands) Occupied Square Feet % % Weighted Average Rate per Occupied Square Foot September 30, 2016 (1) 20,533 96.3% $ 18.84 3,342 87.6% $ 21.27 187 0.7% 1,075 4.3% 25,137 95.0% $ 19.18 Tenant possession Tenant closures Tenant closures for redevelopment Developments – tenants coming online (2) Demolitions Reclassification Total portfolio before 2016 acquisitions and dispositions Acquisitions (at date of acquisition) Dispositions (at date of disposition) 162 (150) (3) 4 — 4 21.68 (17.99) (38.50) 41.79 — — 42 (35) (1) 65 — (2) 20.28 (27.64) (18.42) 45.93 — — — — 4 — (7) 10 (204) 185 — (1) — 7 — — — 68 (7) 19 21.39 (19.83) (32.46) 45.67 — — 20,550 96.3% $ 18.93 3,411 88.0% $ 21.70 194 0.8% 1,062 4.2% 25,217 95.0% $ 19.32 — — — — 58 — 95.1% 46.15 —% — — — 3 — 61 — 95.1% 46.15 —% — December 31, 2016 20,550 96.3% $ 18.93 3,469 88.1% $ 22.11 194 0.8% 1,065 4.2% 25,278 95.0% $ 19.39 Renewals Renewals – expired 585 (585) Net change per square foot from renewals % Increase on renewal of expiring rents $ 16.76 $ (15.42) $ 1.34 8.7% 50 (50) $ 24.11 $ (23.36) $ 0.75 3.2 % 635 (635) $ 17.33 $ (16.04) $ 1.29 8.0% (1) Opening balance is revised to reflect property categories consistent with current period status. (2) For further discussion of development and redevelopment coming online and under development vacancy, refer to the “Properties Under Development – 2016 Development and Redevelopment Coming Online and Space Going Offline” section of this MD&A. FIRST CAPITAL REALTY ANNUAL REPORT 2016 24 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued During the year ended December 31, 2016, the Company achieved a 7.5% overall rate increase per occupied square foot on 1,637,000 square feet of renewal leases over the expiring lease rates. The rate increase for the Same Property portfolio was 8.2% on 1,481,000 square feet of renewals. The average rental rate per occupied square foot for the total portfolio increased from $18.84 as at December 31, 2015 to $19.39 as at December 31, 2016 primarily due to rent escalations. Changes in the Company’s gross leasable area and occupancy for the total portfolio are set out below: Year ended December 31, 2016 Total Same Property Major redevelopment, ground- up, acquisitions and dispositions Vacancy Total Portfolio Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Occupied Square Feet (thousands) % Weighted Average Rate per Occupied Square Foot Under Redevelop- ment Square Feet (thousands) Vacant Square Feet (thousands) % Total Square Feet (thousands) Occupied Square Feet % % Weighted Average Rate per Occupied Square Foot December 31, 2015 (1) 20,425 96.0% $ 18.62 2,734 86.9% $ 20.52 133 0.5% 1,139 4.7% 24,431 94.8% $ 18.84 Tenant possession Tenant closures Tenant closures for redevelopment Developments – tenants coming online (2) Redevelopments – tenant possession Demolitions Reclassifications Total portfolio before 2016 acquisitions and dispositions Acquisitions (at date of acquisition) Dispositions (at date of disposition) 518 (460) (23) 79 — — 11 20.99 (19.16) (19.66) 158 (115) (25) 29.71 185 — — — 5 — (17) 24.36 (27.30) (15.62) 32.92 5.30 — — — — 48 — (5) (22) 30 (676) 575 — 24 — — (56) — — — 288 — (22) (32) 21.78 (20.79) (17.54) 31.96 5.30 — — 20,550 96.3% $ 18.93 2,925 88.0% $ 21.33 184 0.7% 1,006 4.1% 24,665 95.2% $ 19.23 — — — — 759 91.0% 20.64 (215) 97.3% (6.35) 10 — 65 (6) 834 91.0% 20.64 (221) 97.3% (6.35) December 31, 2016 20,550 96.3% $ 18.93 3,469 88.1% $ 22.11 194 0.8% 1,065 4.2% 25,278 95.0% $ 19.39 Renewals Renewals – expired 1,481 (1,481) Net change per square foot from renewals % Increase on renewal of expiring rents % Increase in rate per square foot – openings versus all closures $ 17.35 $ (16.03) $ 1.32 8.2% 9.4% 156 (156) $ 24.33 $ (23.57) $ 0.76 3.2 % (5.5%) 1,637 (1,637) $ 18.01 $ (16.75) $ 1.26 7.5% 5.5% (1) Opening balance is revised to reflect property categories consistent with current period status. (2) For further discussion of development and redevelopment coming online and under development vacancy, refer to the “Properties Under Development – 2016 Development and Redevelopment Coming Online and Space Going Offline” section of this MD&A. 25 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Top Forty Tenants As at December 31, 2016, 54.7% of the Company’s annualized minimum rent came from its top 40 tenants (December 31, 2015 – 54.9%). Of these rents, 77.9% came from tenants that have investment grade credit ratings and who represent many of Canada’s leading grocery stores, pharmacies, national and discount retailers, financial institutions and other familiar shopping destinations. The weighted average remaining lease term for the Company’s top 10 tenants was 6.0 years as at December 31, 2016, excluding contractual renewal options. Rank Tenant (1) (2) Number of Stores Square Feet (thousands) Percent of Total Annualized Minimum Rent 10.2% Loblaw Companies Limited (“Loblaw”) 1. 6.6% Sobeys 2. 3.4% Metro 3. 2.8% Walmart 4. 2.8% Canadian Tire 5. 2.2% TD Canada Trust 6. 1.9% RBC Royal Bank 7. 1.8% GoodLife Fitness 8. 1.8% Dollarama 9. 1.5% 10. CIBC 35.0% Top 10 Tenants Total 1.2% LCBO 11. 1.2% Lowes 12. 1.1% Rexall 13. 1.1% BMO 14. 1.0% London Drugs 15. 1.0% Restaurant Brands International 16. 0.9% Scotiabank 17. 0.9% Staples 18. 0.8% Save-On-Foods 19. 0.7% 20. Whole Foods Market 0.7% 21. Longo's 0.7% 22. Winners 0.7% SAQ 23. 0.7% Starbucks 24. 0.7% Jean Coutu 25. 0.6% 26. Cara 0.6% 27. Michaels 0.6% 28. 0.5% 29. McDonald's 0.5% Pusateri's 30. 0.5% The Beer Store 31. 0.4% Toys "R" Us 32. 0.4% Yum! Brands 33. 0.4% 34. The Home Depot 0.3% 35. Williams-Sonoma 0.3% 36. 0.3% 37. 0.3% 38. 0.3% 39. 0.3% 40. Top 40 Tenants Total 54.7% (1) The names noted above may be the names of the parent entities and are not necessarily the covenants under the leases. (2) Tenants noted include all banners of the respective retailer. Percent of Total Gross Leasable Area 10.4% 8.5% 5.0% 6.2% 3.7% 1.1% 1.0% 2.5% 2.1% 0.9% 41.4% 0.9% 1.8% 0.7% 0.6% 1.1% 0.6% 0.5% 1.2% 1.1% 0.6% 0.7% 1.1% 0.4% 0.3% 0.7% 0.5% 0.5% 0.3% 0.4% 0.1% 0.3% 0.5% 0.2% 0.9% 0.2% 0.2% 0.2% 0.4% 0.3% 0.2% 58.9% 2,487 2,052 1,212 1,486 878 263 250 606 515 207 9,956 215 421 173 145 259 141 126 278 263 133 170 262 104 72 175 112 110 84 94 35 73 127 53 219 38 54 54 101 73 54 14,174 98 57 35 15 26 50 46 26 53 37 443 22 4 19 32 10 53 24 11 6 3 4 9 21 43 13 24 5 71 23 1 12 3 28 2 2 14 19 18 2 11 952 Liquor Stores Pet Valu Reitmans Hudson's Bay Company Bulk Barn Subway DBRS Credit Rating S&P Credit Rating Moody’s Credit Rating BBB BBB (low) BBB AA BBB (high) AA AA BBB AA AA (low) A (low) AA AA A (high) BBB BB+ BBB AA BBB+ AA- AA- A+ A+ A- A+ B+ A+ BBB- Aa2 Aa1 Aa3 Aa3 Aa2 A3 Aa3 B1 Aa3 Baa2 BBB- Baa3 A+ A+ A B+ A2 Aa2 A2 B1 BBB+ Baa1 AA (low) A A+ B- BB A Aa2 B3 Ba3 A2 B+ B1 FIRST CAPITAL REALTY ANNUAL REPORT 2016 26 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Lease Maturity Profile The Company’s lease maturity profile for its shopping centre portfolio as at December 31, 2016, excluding any contractual renewal options, is as follows: Number of Stores Occupied Square Feet (thousands) Maturity Date Month-to-month tenants (1) 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Thereafter Total or Weighted Average 177 649 656 665 584 501 299 193 173 184 165 73 92 4,411 Percent of Total Square Feet 1.4% 10.2% 12.0% 11.4% 11.2% 10.1% 9.0% 6.3% 4.4% 4.0% 3.7% 2.5% 8.8% $ Annualized Minimum Rent at Expiration (thousands) 6,346 44,411 55,074 58,033 54,889 50,568 49,611 31,637 24,108 25,266 25,720 15,915 49,409 Percent of Total Annualized Minimum Rent 1.3% 9.0% 11.2% 11.8% 11.2% 10.3% 10.1% 6.4% 4.9% 5.2% 5.2% 3.2% 10.2% $ Average Annual Minimum Rent per Square Foot at Expiration 17.73 17.25 18.07 20.20 19.46 19.80 21.89 19.84 21.62 25.07 27.12 25.21 22.18 358 2,575 3,047 2,873 2,820 2,554 2,266 1,595 1,115 1,008 948 631 2,229 24,019 95.0% $ 490,987 100.0% $ 20.44 (1) Includes tenants on over hold including renewals and extensions under negotiation, month-to-month tenants and tenants in space at properties with future redevelopment. The weighted average remaining lease term for the portfolio was 5.3 years as at December 31, 2016, excluding contractual renewal options, but including month-to-month and other short-term leases with tenants in properties with pre-development activities underway. 27 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Loans, Mortgages and Other Real Estate Assets As at Non-current Loans and mortgages receivable (a) Available-for-sale ("AFS") investment in limited partnership Deposit on investment property (b) Total non-current Current Loans and mortgages receivable (a) Fair value through profit or loss ("FVTPL") investments in securities (c) Other receivable Total current Total December 31, 2016 December 31, 2015 $ $ $ $ 131,955 3,824 189,200 324,979 15,281 12,969 66 28,316 353,295 $ $ $ $ 120,173 4,269 — 124,442 23,499 11,907 70 35,476 159,918 (a) Loans and mortgages receivable are primarily secured by interests in investment properties or shares of entities owning investment properties. (b) In the third quarter of 2016, the Company advanced $189.2 million as a deposit on the acquisition of an investment property, located at One Bloor Street in Toronto, that is currently under construction. The deposit earns interest of 4.5% annually until the purchase closing date which is estimated to be in the fourth quarter of 2017. (c) The Company has invested in publicly traded real estate and related securities. These securities are recorded at market value. Realized and unrealized gains and losses on FVTPL securities are recorded in other gains (losses) and (expenses). RESULTS OF OPERATIONS Net Income Three months ended December 31 Year ended December 31 Net income attributable to common shareholders Net income per share attributable to common shareholders (diluted) 2016 57,739 0.24 $ $ 2015 38,947 0.17 $ $ $ $ Weighted average number of common shares – 252,602 226,537 diluted (in thousands) 2016 382,714 1.59 246,428 $ $ 2015 203,865 0.91 235,870 For the three months ended December 31, 2016, net income attributable to common shareholders was $57.7 million or $0.24 per diluted share compared to $38.9 million or $0.17 per diluted share for the prior year. The $18.8 million increase in net income attributable to common shareholders was primarily due to an increase in the fair value of investment properties of $12.7 million on a proportionate basis compared to a decrease of $9.2 million for the fourth quarter of 2015. For the year ended December 31, 2016, net income attributable to common shareholders was $382.7 million or $1.59 per diluted share compared to $203.9 million or $0.91 per diluted share for the prior year. The $178.8 million increase in net income attributable to common shareholders was primarily due to an increase in the fair value of investment properties of $222.9 million on a proportionate basis compared to an increase of $45.0 million in the prior year. FIRST CAPITAL REALTY ANNUAL REPORT 2016 28 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Reconciliation of Consolidated Statements of Income, as presented, to the Company’s Proportionate Interest The following table provides a reconciliation of the Company's consolidated statements of income for the three months ended December 31, 2016, to its proportionate interest. Three months ended December 31 2016 2015 Property rental revenue Property operating costs Net operating income Other income and expenses Interest and other income Interest expense Corporate expenses Abandoned transaction costs Amortization expense Share of profit from joint ventures Other gains (losses) and (expenses) Increase (decrease) in value of investment properties, net Income before income taxes Deferred income taxes Net income Net income attributable to: Common shareholders Non-controlling interest Consolidated Statements of Income Adjustment to proportionate interest Proportionate interest Consolidated Statements of Income Adjustment to proportionate interest Proportionate interest $ 172,731 $ 66,425 106,306 2,185 $ 737 1,448 174,916 $ 67,162 107,754 164,244 $ 60,949 103,295 1,947 $ 584 1,363 166,191 61,533 104,658 (123) (538) 289 — — (2,983) 319 651 7,030 (40,944) (9,762) (160) (369) — 631 12,743 3,697 (41,631) (8,558) (71) (708) 2,012 387 (9,541) 258 (146) 238 — (15) (2,012) (27) 387 3,955 (41,777) (8,320) (71) (723) — 360 (9,154) (2,385) (30,831) (54,413) (1,317) (55,730) 7,153 (40,406) (10,051) (160) (369) 2,983 312 12,092 (28,446) 77,860 19,177 (937) 7 76,923 19,184 48,882 9,981 $ $ $ 58,683 $ (944) $ 57,739 $ 38,901 $ 57,739 $ 944 58,683 $ — $ (944) (944) $ 57,739 $ — 57,739 $ 38,947 $ (46) 38,901 $ 46 — 46 $ — $ 46 46 $ 48,928 9,981 38,947 38,947 — 38,947 Net income per share attributable to common shareholders: Basic Diluted $ $ 0.24 0.24 $ $ 0.17 0.17 29 FIRST CAPITAL REALTY ANNUAL REPORT 2016 The following table provides a reconciliation of the Company's consolidated statements of income, as presented in the audited annual consolidated financial statements, to its proportionate interest. Year ended December 31 2016 2015 Property rental revenue Property operating costs Net operating income Other income and expenses Interest and other income Interest expense Corporate expenses Abandoned transaction costs Amortization expense Share of profit from joint ventures Other gains (losses) and (expenses) Increase (decrease) in value of investment properties, net Income before income taxes Deferred income taxes Net income Net income attributable to: Common shareholders Non-controlling interest Consolidated Statements of Income Adjustment for proportionate interest Proportionate interest Consolidated Statements of Income Adjustment for proportionate interest Proportionate interest $ 676,284 $ 254,287 421,997 7,938 $ 2,632 5,306 684,222 $ 256,919 427,303 654,792 $ 244,900 409,892 7,401 $ 2,277 5,124 662,193 247,177 415,016 19,641 (158,687) (34,910) (321) (1,287) 12,437 (586) 218,078 (223) (1,985) 1,069 (6) — (12,437) 369 4,831 19,418 (160,672) (33,841) (327) (1,287) — (217) 222,909 17,702 (163,481) (35,660) (786) (2,892) 12,178 (15,155) 37,773 (62) (706) 955 — (26) (12,178) (188) 7,226 17,640 (164,187) (34,705) (786) (2,918) — (15,343) 44,999 54,365 476,362 90,570 385,792 $ 382,714 $ 3,078 385,792 $ $ $ $ (8,382) (3,076) 2 (3,078) $ 45,983 473,286 90,572 382,714 $ (150,321) 259,571 55,843 203,728 $ (4,979) 145 8 137 $ (155,300) 259,716 55,851 203,865 — $ 382,714 $ (3,078) (3,078) $ — 382,714 $ 203,865 $ (137) 203,728 $ — $ 137 137 $ 203,865 — 203,865 Net income per share attributable to common shareholders: 1.62 1.59 Basic Diluted $ $ $ $ 0.91 0.91 FIRST CAPITAL REALTY ANNUAL REPORT 2016 30 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Net Operating Income NOI is defined as property rental revenue less property operating costs. NOI is commonly used as a primary method for analyzing real estate performance in Canada and, in Management's opinion, is useful in analyzing the operating performance of the Company’s shopping centre portfolio. NOI is not a measure defined by IFRS and as such, there is no standard definition. As a result, NOI may not be comparable with similar measures presented by other entities. NOI is not to be construed as an alternative to net income or cash flow from operating activities determined in accordance with IFRS. The Company’s proportionate interest in net operating income for the shopping centre portfolio is presented below: Three months ended December 31 2015 2016 % change % change Year ended December 31 2015 2016 Property rental revenue Base rent Operating cost recoveries Realty tax recoveries Lease surrender fees Percentage rent Prior year operating cost and tax recovery adjustments Temporary tenants, storage, parking and other Total Same Property rental revenue Property operating costs Recoverable operating expenses Recoverable realty tax expenses Other operating costs and adjustments Total Same Property operating costs Total Same Property NOI Major redevelopment Ground-up development Acquisitions – 2016 Acquisitions – 2015 Investment properties classified as held for sale Dispositions – 2016 Dispositions – 2015 Straight-line rent adjustment Development land NOI NOI margin $ 91,066 21,448 27,334 309 1,102 (99) 3,008 $ 89,558 19,987 25,000 625 1,079 84 3,081 $ 361,587 80,032 109,196 1,859 2,108 (289) $ 356,437 78,116 106,166 4,146 2,377 461 10,909 10,603 144,168 139,414 565,402 558,306 2.2% $ 23,800 29,554 (241) 53,113 91,055 7,549 2,638 2,964 1,131 1,096 115 (29) 910 325 3.0% $ 107,754 $ 22,236 27,413 665 50,314 89,100 8,374 1,999 — 1,152 1,027 1,506 18 1,313 169 104,658 88,265 118,050 (1,019) 205,296 $ 360,106 32,118 9,527 8,105 4,582 4,025 1,929 34 5,861 1,016 $ 427,303 86,684 114,612 970 202,266 $ 356,040 33,107 6,396 — 3,348 4,165 5,885 453 4,927 695 $ 415,016 1.1% 3.0% 61.6% 63.0% 62.5% 62.7% For the three months and year ended December 31, 2016, Same Property – stable NOI increased 1.1% and 0.8%, respectively, compared to the prior years. For the three months ended December 31, 2016, Total Same Property NOI increased by $2.0 million or 2.2% to $91.1 million from $89.1 million primarily due to rent escalations, increased occupancy driving higher rents and lower other operating costs. For the year ended December 31, 2016, Total Same Property NOI increased by $4.1 million or 1.1% to $360.1 million from $356.0 million primarily due to rent escalations, lease renewals at higher rates, and lower other operating costs, partially offset by lower lease surrender fees compared to the prior year. 31 FIRST CAPITAL REALTY ANNUAL REPORT 2016 For the three months and year ended December 31, 2016, total NOI increased by $3.1 million and $12.3 million, respectively, compared to prior year periods primarily due to the net contribution from acquisitions and dispositions completed, Same Property NOI growth as well as the impact of developments coming online in the current year. NOI by Region NOI by segment at the Company’s proportionate interest is as follows: Three months ended December 31, 2016 Property rental revenue Property operating costs NOI Three months ended December 31, 2015 Property rental revenue Property operating costs NOI Year ended December 31, 2016 Property rental revenue Property operating costs NOI Year ended December 31, 2015 Property rental revenue Property operating costs NOI Central Region Eastern Region Western Region Subtotal Other (1) Total 73,128 $ 45,759 $ 56,826 $ 175,713 $ (797) $ 174,916 29,739 19,466 18,967 68,172 (1,010) 67,162 43,389 $ 26,293 $ 37,859 $ 107,541 $ 213 $ 107,754 Central Region Eastern Region Western Region Subtotal Other (1) Total 69,520 $ 45,629 $ 51,519 $ 166,668 $ (477) $ 166,191 27,280 19,171 15,715 62,166 (633) 61,533 42,240 $ 26,458 $ 35,804 $ 104,502 $ 156 $ 104,658 Central Region Eastern Region Western Region Subtotal Other (1) Total 283,923 $ 181,886 $ 221,480 $ 687,289 $ (3,067) $ 684,222 109,874 78,353 73,010 261,237 (4,318) 256,919 174,049 $ 103,533 $ 148,470 $ 426,052 $ 1,251 $ 427,303 Central Region Eastern Region Western Region Subtotal Other (1) Total 278,185 $ 178,105 $ 208,527 $ 664,817 $ (2,624) $ 662,193 106,525 76,155 67,224 249,904 (2,727) 247,177 171,660 $ 101,950 $ 141,303 $ 414,913 $ 103 $ 415,016 $ $ $ $ $ $ $ $ (1) Other items principally consist of intercompany eliminations. Interest and Other Income For the three months and year ended December 31, 2016, the Company's proportionate share of interest and other income totaled $7.0 million and $19.4 million, compared to $4.0 million and $17.6 million, respectively, for the same prior year periods. The increase of $1.8 million over the prior year is primarily due to interest earned on the Company's outstanding loans, deposits and mortgages, offset by lower interest and dividends earned on the Company's marketable securities. FIRST CAPITAL REALTY ANNUAL REPORT 2016 32 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Interest Expense The Company’s proportionate share of interest expense by type is as follows: Mortgages Credit facilities Senior unsecured debentures Convertible debentures (non-cash) Interest capitalized Interest expense $ $ Three months ended December 31 2015 12,330 1,874 2016 12,130 1,584 $ $ Year ended December 31 2015 51,654 4,410 2016 48,965 7,385 $ 29,602 3,192 (5,564) 40,944 26,999 5,177 (4,603) 41,777 $ 112,023 14,603 (22,304) 106,844 22,118 (20,839) $ 160,672 $ 164,187 For the three months and year ended December 31, 2016, interest expense decreased by $0.8 million and $3.5 million, respectively, primarily due to the early redemption of higher rate convertible debentures in the current and prior years, partially offset by the impact of new lower rate senior unsecured debenture issuances. During the year ended December 31, 2016 and 2015, approximately 12.2% and 11.3% of interest expense was capitalized to real estate investments for properties undergoing development or redevelopment projects. Amounts capitalized are dependent on interest expense paid, on the phase and magnitude of development and redevelopment projects actively underway as well as the portfolio weighted average interest rate. The increase in capitalized interest over the prior year is due to higher cumulative development expenditure. Corporate Expenses The Company's proportionate share of corporate expenses is as follows: Salaries, wages and benefits Non-cash compensation Other corporate costs Total corporate expenses Amounts capitalized to investment properties under development Three months ended December 31 Year ended December 31 $ $ 2016 7,391 1,004 3,031 11,426 (1,664) $ 2015 6,645 673 3,057 10,375 (2,055) 2016 26,593 3,469 10,216 40,278 (6,437) $ 2015 28,513 2,941 11,182 42,636 (7,931) Corporate expenses $ 9,762 $ 8,320 $ 33,841 $ 34,705 For the year ended December 31, 2016, corporate expenses decreased by $0.9 million to $33.8 million compared to the prior year primarily due to lower employee compensation expense of $1.9 million as a result of the organizational restructuring completed in 2015. Other corporate costs were also lower by $1.0 million over the prior year as a result of the restructuring, and certain non-recurring costs incurred in 2015. The Company manages all of its acquisitions, development and redevelopment and leasing activities internally. Certain internal costs directly related to development, including salaries and related costs for planning, zoning, construction and so forth, are capitalized in accordance with IFRS to development projects as incurred. During the year ended December 31, 2016 and 2015, approximately 17.5% and 20.0%, respectively, of compensation-related and other corporate expenses were capitalized to real estate investments for properties undergoing development or redevelopment projects. Amounts capitalized are based on development and pre-development projects underway. Changes in capitalized corporate expenses are primarily the result of timing of completion of development and redevelopment projects and the Company’s current level of pre-development and early redevelopment activity. 33 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Other Gains (Losses) and (Expenses) The Company's proportionate share of other gains, losses and expenses is as follows: Three months ended December 31 2016 2015 Proportionate Statement of Income Included in FFO Included in AFFO Proportionate Statement of Income Included in FFO Included in AFFO Unrealized gain (loss) on marketable securities $ (123) $ (123) $ — $ 636 $ 636 $ classified as FVTPL Net gain (loss) on prepayments of debt Proceeds from Target Investment properties selling costs Restructuring costs Other Total (10) 663 46 — 55 631 $ (10) 663 — — 55 585 $ $ — 663 — — — 663 $ 2016 (71) — (64) (126) (15) 360 $ (71) — — (126) (15) 424 $ — — — — — — — Year ended December 31 2015 Proportionate Statement of Income Included in FFO Included in AFFO Proportionate Statement of Income Included in FFO Included in AFFO Realized gain (loss) on sale of marketable securities Unrealized gain (loss) on marketable securities classified as FVTPL $ 79 $ 79 $ 1,071 1,071 79 $ — 784 $ 784 $ (2,022) (2,022) Net gain (loss) on prepayments of debt Proceeds from Target Investment properties selling costs Restructuring costs Other Total (1,119) 3,813 (2,030) (1,988) (43) (217) $ (1,119) 3,813 — (1,988) (43) 1,813 $ — 3,813 — — — 3,892 $ (310) — (539) (13,085) (171) (15,343) $ (310) — — (13,085) (171) (14,804) $ $ 784 — — — — — — 784 For the three months ended December 31, 2016, the Company recognized a $0.6 million gain in its proportionate statement of income compared to a $0.4 million gain in 2015. For the year ended December 31, 2016, the Company recognized a $0.2 million loss in its proportionate statement of income compared to a $15.3 million loss in the prior year. The lower loss over prior year was primarily due to lower restructuring costs of $11.1 million, related to the organizational restructuring undertaken in 2015, as well as the recognition of proceeds totaling $3.8 million under Target Canada's CCAA plan of arrangement related to the closure of two Target stores in the Company's portfolio. Income Taxes For the three months ended December 31, 2016, deferred income tax expense totaled $19.2 million compared to $10.0 million for the prior year. For the year ended December 31, 2016, deferred income tax expense totaled $90.6 million compared to $55.9 million for the prior year. The increase of $9.2 million and $34.7 million over the same prior year periods, respectively, is primarily due to the tax impact of a higher increase in fair value of investment properties over prior periods. FIRST CAPITAL REALTY ANNUAL REPORT 2016 34 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Non-IFRS Supplemental Financial Measures In Management’s view, FFO and AFFO are commonly accepted and meaningful indicators of financial performance in the real estate industry. These measures are the primary metrics used in analyzing real estate organizations in Canada. FFO and AFFO are not measures defined by IFRS and, as such, neither of them has a standard definition. The Company’s method of calculating FFO and AFFO may be different from methods used by other corporations or REITs (real estate investment trusts) and, accordingly, may not be comparable to such other corporations or REITs. FFO and AFFO: (i) do not represent cash flow from operating activities as defined by IFRS, (ii) are not indicative of cash available to fund all liquidity requirements, including payment of dividends and capital for growth, and (iii) are not to be considered as alternatives to IFRS net income for the purpose of evaluating operating performance. Funds from Operations The Company calculates FFO in accordance with the recommendations of the Real Property Association of Canada (“REALpac”). The use of FFO has been included for the purpose of improving the understanding of the operating results of the Company. FFO is considered a meaningful additional financial measure of operating performance, as it excludes fair value gains and losses on investment properties as well as certain other items included in the Company's net income that may not be the most appropriate determinants of the long-term operating performance of the Company, such as investment property selling costs and deferred income taxes. FFO provides a perspective on the financial performance of the Company that is not immediately apparent from net income determined in accordance with IFRS. A reconciliation from net income attributable to common shareholders to FFO can be found in the table below: Net income attributable to common shareholders Add (deduct): (Increase) decrease in value of investment properties Incremental leasing costs Investment properties selling costs Adjustment for equity accounted joint ventures Deferred income taxes Three months ended December 31 Year ended December 31 2016 57,739 $ 2015 38,947 $ 2016 382,714 $ 2015 203,865 $ (12,743) 1,671 (46) 1,019 19,184 9,154 674 64 28 9,981 (222,909) 6,657 2,030 3,480 90,572 (44,999) 3,373 539 2,636 55,851 FFO $ 66,824 $ 58,848 $ 262,544 $ 221,265 Operating FFO Management considers Operating FFO as its key operating performance measure that, when compared period over period, reflects the impact of certain factors on its core operations, such as changes in net operating income, interest expense, corporate expenses and other income. Operating FFO excludes the impact of certain items in other gains (losses) and (expenses) that are not considered part of the Company's on-going core operations. The weighted average number of diluted shares outstanding for FFO and Operating FFO is calculated assuming conversion of only those convertible debentures outstanding that would have a dilutive effect upon conversion, at the holders' contractual conversion price. 35 FIRST CAPITAL REALTY ANNUAL REPORT 2016 The components of Operating FFO and FFO at proportionate interest are as follows: Net operating income Interest and other income Interest expense (1) Corporate expenses (2) Abandoned transaction costs Amortization expense Three months ended December 31 Year ended December 31 % change 2016 2015 % change 2016 2015 $ 107,754 $ 104,658 $ 427,303 $ 415,016 7,030 (39,925) (8,091) (160) (369) 66,239 585 3,955 (41,048) (8,347) (71) (723) 58,424 424 58,848 0.26 0.26 19,418 (157,192) (27,184) (327) (1,287) 10.4% 260,731 1,813 17,640 (161,551) (31,332) (786) (2,918) 236,069 (14,804) 18.7% $ 262,544 $ 221,265 4.7% $ 12.6% $ 1.10 1.11 $ $ 1.05 0.99 Operating FFO Other gains (losses) and (expenses) (3) 13.4% FFO Operating FFO per diluted share FFO per diluted share Weighted average number of common shares – diluted – FFO (in thousands) 13.6% $ 66,824 5.0% $ 5.0% $ 0.27 0.27 $ $ $ 8.0% 244,554 226,537 5.4% 236,243 224,069 (1) Includes an adjustment to capitalize interest related to the Company's equity accounted joint ventures in accordance with the recommendations of REALpac. (2) Includes an adjustment to capitalize incremental leasing costs in accordance with the recommendations of REALpac. (3) Refer to the “Results of Operations – Other Gains (Losses) and (Expenses)” section of this MD&A. For the three months ended December 31, 2016, Operating FFO totaled $66.2 million or $0.27 per diluted share compared to $58.4 million or $0.26 per diluted share in the same prior year period. The 5.0% or $0.01 per diluted share increase was primarily due to higher NOI and interest and other income, and lower interest expense. For the three months ended December 31, 2016, FFO totaled $66.8 million or $0.27 per diluted share compared to $58.8 million or $0.26 per diluted share in the same prior year period. The 5.0% or $0.01 per diluted share increase in FFO was due to higher Operating FFO compared to the same prior year period. For the year ended December 31, 2016, Operating FFO totaled $260.7 million or $1.10 per diluted share compared to $236.1 million or $1.05 per diluted share for the prior year. The 4.7% or $0.05 per diluted share increase was primarily due to higher NOI and lower interest and corporate expenses. For the year ended December 31, 2016, FFO totaled $262.5 million or $1.11 per diluted share compared to $221.3 million or $0.99 per diluted share for the prior year. The 12.6% or $0.12 per diluted share increase in FFO was primarily due to higher Operating FFO of $24.7 million, lower restructuring costs of $11.1 million and the recognition of the proceeds from Target of $3.8 million compared to the prior year. FIRST CAPITAL REALTY ANNUAL REPORT 2016 36 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Adjusted Funds from Operations and Operating AFFO AFFO is a supplementary measure that the Company uses to measure operating cash flow generated from the business. In calculating AFFO, the Company adjusts FFO for non-cash and other items including interest payable in shares, straight-line rent adjustment, non-cash compensation expense, Same Property capital expenditures and leasing costs for maintaining shopping centre infrastructures and certain other gains or losses. Residential inventory pre-sale costs are recognized in AFFO when the Company recognizes revenue from the sale of residential units. In addition, the Company calculates Operating AFFO by excluding from AFFO the effects of certain other gains (losses) and (expenses) that are not deemed part of the Company's on-going core operations. The weighted average number of diluted shares outstanding for AFFO is adjusted to assume conversion of all the outstanding convertible debentures, calculated using the holders’ contractual conversion price to be consistent with the treatment of the interest expense payable in shares in AFFO. Operating AFFO and AFFO are calculated as follows: Operating FFO Add (deduct): Interest expense payable in shares Straight-line rent adjustment Non-cash compensation expense Same Property revenue sustaining capital expenditures (1) Costs not capitalized during development period (2) Other adjustments Operating AFFO Other gains (losses) and (expenses) (3) AFFO Operating AFFO per diluted share AFFO per diluted share Weighted average number of common shares – diluted – AFFO (in thousands) Three months ended December 31 Year ended December 31 % change 2016 2015 % change 2016 2015 $ 66,239 $ 58,424 $ 260,731 $ 236,069 3,192 (910) 1,069 (3,381) 1,145 (77) 5,177 (1,313) 730 (4,097) 643 (66) 14,603 (5,861) 3,698 22,118 (4,927) 3,098 (16,838) (17,574) 5,010 (366) 4,317 (293) 13.1% $ 67,277 $ 59,498 7.5% $ 260,977 $ 242,808 663 — 3,892 784 14.2% $ 67,940 $ 59,498 8.7% $ 264,869 $ 243,592 7.7% $ 8.5% $ 0.27 $ 0.27 $ 0.25 0.25 4.4% $ 5.7% $ 1.07 $ 1.08 $ 1.02 1.03 5.3% 253,119 240,409 2.9% 244,623 237,633 (1) Estimated at $0.79 per square foot per annum (2015 – $0.85) on average gross leasable area of same properties (based on an estimated three-year weighted average). (2) The Company has added back costs not capitalized during the development period for accounting purposes that, in Management’s view forms part of the cost of its development projects. (3) Refer to the “Results of Operations – Other Gains (Losses) and (Expenses)” section of this MD&A. For the three months ended December 31, 2016, Operating AFFO increased by 7.7% or $0.02 per diluted share. For the year ended December 31, 2016, Operating AFFO increased 4.4% or $0.05 per diluted share. The increase was primarily due to higher Operating FFO partially offset by a lower adjustment for interest expense payable in shares as a result of the convertible debenture redemptions in the current and prior years. For the three months and year ended December 31, 2016, AFFO per share increased primarily due to higher Operating AFFO and the recognition of the proceeds from Target in the second and fourth quarters. 37 FIRST CAPITAL REALTY ANNUAL REPORT 2016 A reconciliation of cash provided by operating activities to AFFO is presented below: Cash provided by operating activities Adjustments for equity accounted joint ventures Realized gain (loss) on sale of marketable securities Incremental leasing costs Net change in non-cash operating items Adjustments for residential inventory Amortization expense Non-cash interest expense Costs not capitalized during development period Same Property revenue sustaining capital expenditures Cash component of restructuring costs Other adjustments Three months ended December 31 Year ended December 31 $ $ 2016 96,950 2,060 — 1,671 (27,475) — (369) (2,637) 1,145 (3,381) — (24) 2015 84,757 801 — 674 (17,554) — (708) (5,023) 643 (4,097) 68 (63) $ $ 2016 256,598 7,034 79 6,657 8,706 18 (1,287) (2,758) 5,010 (16,838) 1,988 (338) 2015 244,433 5,287 784 3,373 (563) 208 (2,892) 539 4,317 (17,574) 5,972 (292) AFFO $ 67,940 $ 59,498 $ 264,869 $ 243,592 CAPITAL STRUCTURE AND LIQUIDITY Total Capital Employed The real estate business is capital intensive by nature. The Company’s capital structure is key to financing growth and providing sustainable cash dividends to shareholders. In the real estate industry, financial leverage is used to enhance rates of return on invested capital. Management believes that the combination of debt and equity in First Capital Realty’s capital structure provides stability and reduces risk, while generating an acceptable return on investment, taking into account the long-term business strategy of the Company. As at Liabilities (principal amounts outstanding) December 31, 2016 December 31, 2015 Bank indebtedness Mortgages Credit facilities Mortgages under equity accounted joint ventures (at the Company's proportionate interest) Credit facilities under equity accounted joint venture (at the Company's proportionate interest) Senior unsecured debentures Convertible debentures $ 15,914 995,925 251,481 45,612 56,798 2,550,000 212,635 $ 26,200 1,020,358 224,635 2,749 30,953 2,250,000 337,271 Equity capitalization (1) Common shares (based on closing per share price of $20.67; December 31, 2015 – $18.35) 5,033,286 9,161,651 4,138,622 8,030,788 Enterprise value (1) (1) These measures are not defined by IFRS, do not have a standard definition and, as such, may not be comparable to similar measures disclosed by other issuers. Equity $ $ capitalization is the market value of the Company's shares outstanding at a point in time. Enterprise value is the sum of the Company's total debt on a proportionate basis and its equity capitalization. FIRST CAPITAL REALTY ANNUAL REPORT 2016 38 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Key Metrics The ratios below include measures not specifically defined by IFRS: As at Weighted average effective interest rate on mortgages and senior unsecured debentures Weighted average maturity on mortgages and senior unsecured debentures (years) Net debt to total assets (1) Net debt to EBITDA (1) Unencumbered aggregate assets Unencumbered aggregate assets to unsecured debt, based on fair value EBITDA interest coverage (1) December 31, 2016 December 31, 2015 4.5% 5.3 42.6% 9.1 6,627,091 2.4 2.5 4.7% 5.5 42.9% 8.7 5,783,452 2.3 2.5 (1) Calculated with all joint ventures proportionately consolidated. Measures used in these ratios are defined below: • Debt consists of principal amounts outstanding on credit facilities and mortgages, and the par value of senior unsecured debentures. Convertible debentures are excluded as the Company has the option to satisfy its obligations of principal and interest payments in respect of all of its outstanding convertible debentures by the issuance of common shares; • Net debt is calculated as Debt, as defined above, reduced by cash balances at the end of the period; • EBITDA, as adjusted, is calculated as net income, adding back income tax expense, interest expense and amortization and excluding the increase or decrease in the value of investment properties, other gains (losses) and (expenses) and other non-cash or non-recurring items. The Company also adjusts for incremental leasing costs and costs not capitalized during the development period, which are recognized adjustments to FFO and AFFO, respectively. • Unencumbered assets include the value of assets that have not been pledged as security under any credit agreement or mortgage. The unencumbered asset value ratio is calculated as unencumbered assets divided by the principal amount of the unsecured debt, which consists of the bank indebtedness, unsecured credit facilities and senior unsecured debentures. Credit Ratings Since November 2012, DBRS has rated the Company’s senior unsecured debentures as BBB (high) with a stable trend. According to DBRS, a credit rating in the BBB category is generally an indication of adequate credit quality and an acceptable capacity for the payment of financial obligations. DBRS indicates that BBB rated obligations may be vulnerable to future events. A rating trend, expressed as positive, stable or negative, provides guidance in respect of DBRS’ opinion regarding the outlook for the rating in question. Since November 2012, Moody’s has rated the Company’s senior unsecured debentures as Baa2 with a stable outlook. As defined by Moody’s, a credit rating of Baa2 denotes that these debentures are subject to moderate credit risk and are of medium grade and, as such, may possess certain speculative characteristics. A rating outlook provided by Moody’s, expressed as positive, stable, negative or developing, is an opinion regarding the outlook for the rating in question over the medium term. 39 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Consolidated Debt and Principal Maturity Profile The maturity profile of the Company’s proportionate share of its mortgages and credit facilities as well as its senior unsecured debentures as at December 31, 2016 is summarized in the table below: 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Add (deduct): unamortized deferred financing costs, premiums and discounts, net $ Mortgages 111,112 $ 151,418 128,380 65,914 91,719 161,270 11,440 72,152 64,166 183,966 1,041,537 996 Credit Facilities/Bank Indebtedness 58,160 $ 54,793 11,875 153,451 45,914 — — — — — 324,193 — Senior Unsecured Debentures 250,000 150,000 150,000 175,000 175,000 450,000 300,000 300,000 300,000 300,000 2,550,000 (3,558) $ Total 419,272 356,211 290,255 394,365 312,633 611,270 311,440 372,152 364,166 483,966 3,915,730 (2,562) % Due 10.7% 9.1% 7.4% 10.1% 8.0% 15.5% 8.0% 9.5% 9.3% 12.4% 100.0% Total $ 1,042,533 $ 324,193 $ 2,546,442 $ 3,913,168 The Company’s strategy is to manage its long-term debt by staggering maturity dates in order to mitigate risk associated with short-term volatility in the debt markets. The Company also intends to maintain financial strength to achieve a reasonable cost of debt and equity capital over the long term. When it is deemed appropriate, the Company will raise equity as a source of financing and may strategically sell non-core assets to best redeploy capital and take advantage of market opportunities. Mortgages The changes in the Company’s mortgages during the year ended December 31, 2016, including its proportionate share of mortgages in equity accounted joint ventures, are set out below: Year ended December 31, 2016 Balance at beginning of year Mortgage borrowings Mortgage repayments Scheduled amortization on mortgages Amortization of financing costs and net premium Balance at end of year Amount 1,026,752 203,400 (155,645) (29,325) (2,649) 1,042,533 $ $ Weighted Average Effective Interest Rate 4.5% 3.2% 4.0% — — 4.3% As at December 31, 2016, 100% (December 31, 2015 – 100%) of the outstanding mortgages bore interest at fixed interest rates. The average remaining term of mortgages outstanding increased from 4.1 years as at December 31, 2015 on $1.0 billion of mortgages to 4.6 years as at December 31, 2016 on $1.0 billion of mortgages after reflecting borrowing activity and repayments during the period. FIRST CAPITAL REALTY ANNUAL REPORT 2016 40 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Mortgage Maturity Profile The maturity profile of the Company’s proportionate share of mortgages as at December 31, 2016 is summarized in the table below: As at December 31, 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Add: unamortized deferred financing costs and premiums and discounts, net Total Scheduled Amortization 28,210 24,348 21,666 20,056 18,322 13,316 11,440 10,882 8,271 2,783 159,294 $ $ Payments on Maturity $ $ 82,902 127,070 106,714 45,858 73,397 147,954 — 61,270 55,895 181,183 882,243 Weighted Average Effective Interest Rate 4.1% 5.4% 6.5% 5.3% 4.4% 3.9% — 4.0% 3.6% 3.3% 4.3% $ Total 111,112 151,418 128,380 65,914 91,719 161,270 11,440 72,152 64,166 183,966 $ 1,041,537 996 $ 1,042,533 Credit Facilities The credit facilities provide liquidity primarily for financing acquisitions, development and redevelopment activities and for general corporate purposes. The Company has the flexibility under its unsecured credit facilities to draw funds based on Canadian bank prime rates, and Canadian bankers’ acceptances (“BA rates”) for Canadian dollar-denominated borrowings, and LIBOR rates or U.S. prime rates for U.S. dollar-denominated borrowings. As of December 31, 2016, the Company had drawn CAD$30.0 million and US$114.3 million, as well as CAD$15.9 million in bank indebtedness on its unsecured credit facilities. Concurrently with the U.S. dollar draws, the Company entered into cross currency swaps to exchange its U.S. dollar borrowings into Canadian dollar borrowings. During the first quarter, the Company completed an extension of one of its secured construction facilities from March 31, 2016 to March 31, 2017 and effective June 30, 2016, the Company extended the maturity of its $800 million unsecured facility to June 30, 2021 on substantially the same terms. In September 2016, the Company entered into two secured facilities totaling $19.4 million, at the Company's proportionate interest, maturing between 2018 and 2019. In the fourth quarter, the Company entered into a new unsecured facility with a borrowing capacity of CAD$150 million, key terms of which are presented in the table below. 41 FIRST CAPITAL REALTY ANNUAL REPORT 2016 The Company’s credit facilities, including its proportionate share of facilities under the equity accounted joint ventures, as at December 31, 2016 are summarized in the table below: As at December 31, 2016 Unsecured operating facilities Borrowing Capacity Amounts Drawn Bank Indebtedness and Outstanding Letters of Credit Available to be Drawn Interest Rates Maturity Date Revolving facility maturing $ 800,000 $ (30,000) $ (46,615) $ 723,385 150,000 (153,451) — — BA + 1.20% or Prime + 0.20% or US$ LIBOR + 1.20% BA + 1.20% or Prime + 0.20% or US$ LIBOR + 1.20% June 30, 2021 October 30, 2020 2021 Non-revolving facility maturing 2020 (1) Secured construction facilities Maturing 2018 115,000 (40,870) (1,475) 72,655 Maturing 2017 7,953 (7,785) Credit facilities under equity accounted joint ventures 69,114 (56,798) Secured Facilities Maturing 2019 11,875 (11,875) Maturing 2018 7,500 (7,500) — — — — 168 12,316 BA + 1.125% or Prime + 0.125% BA + 1.125% or Prime + 0.125% February 13, 2018 March 31, 2017 Between Prime - 0.15% and Prime + 1.5% Between January 2017 and March 2018 — — BA + 1.125% or Prime + 0.125% BA + 1.125% or Prime + 0.125% September 27, 2019 September 6, 2018 Total $ 1,161,442 $ (308,279) $ (48,090) $ 808,524 (1) The Company had drawn in US dollars the equivalent of CAD$150.0 million which was revalued at CAD$153.5 million as at December 31, 2016, as such the Company is in compliance with its borrowing capacity. Senior Unsecured Debentures As at December 31, 2016 Series Maturity Date Interest Payment Dates H I J K L M N O P Q R S T January 31, 2017 November 30, 2017 August 30, 2018 November 30, 2018 July 30, 2019 April 30, 2020 March 1, 2021 January 31, 2022 December 5, 2022 October 30, 2023 August 30, 2024 July 31, 2025 May 6, 2026 Weighted Average or Total January 31, July 31 May 30, November 30 February 28, August 30 May 31, November 30 January 30, July 30 April 30, October 30 March 1, September 1 January 31, July 31 June 5, December 5 April 30, October 30 August 30, February 28 January 31, July 31 November 5, May 5 Interest Rate Coupon 5.85% 5.70% 5.25% 4.95% 5.48% 5.60% 4.50% 4.43% 3.95% 3.90% 4.79% 4.32% 3.60% 4.57% Effective 5.99% 5.79% 5.66% 5.17% 5.61% 5.60% 4.63% 4.59% 4.18% 3.97% 4.72% 4.24% 3.56% 4.63% Remaining Term to Maturity (years) 0.1 0.9 1.7 1.9 2.6 3.3 4.2 5.1 5.9 6.8 7.7 8.6 9.4 5.6 Principal Outstanding $ $ 125,000 125,000 50,000 100,000 150,000 175,000 175,000 200,000 250,000 300,000 300,000 300,000 300,000 2,550,000 FIRST CAPITAL REALTY ANNUAL REPORT 2016 42 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued On May 6, 2016 the Company completed the issuance of $150.0 million principal amount of Series T senior unsecured debentures due May 6, 2026. These debentures bear interest at a coupon rate of 3.604% per annum and an effective interest rate of 3.7%, payable semi-annually commencing November 6, 2016. On September 29, 2016, the Company completed the issuance of an additional $150.0 million principal amount of Series T senior unsecured debentures, which was a re-opening of this series of debentures, with an effective interest rate of 3.4%. Convertible Debentures As at December 31, 2016 Series Maturity Date January 31, 2019 January 31, 2019 July 31, 2019 E F I J Interest Payment Dates March 31 September 30 March 31 September 30 March 31 September 30 Interest Rate Coupon Effective 5.40% 6.90% 5.25% 6.07% 4.75% 6.19% 4.45% 5.34% February 28, 2020 March 31 September 30 Weighted Average or Total 4.96% 6.12% Remaining Term to Maturity (yrs) 2.1 Principal at Issue Date Principal Liability $ 57,500 $ 54,666 $ 53,095 $ Equity 2,084 2.1 2.6 3.2 2.5 57,500 51,584 50,773 351 52,500 51,210 49,822 1,403 57,500 55,175 53,943 386 $ 225,000 $ 212,635 $ 207,633 $ 4,224 (i) Principal and Interest During the year ended December 31, 2016, 0.7 million common shares (year ended December 31, 2015 – 1.0 million common shares) were issued totaling $13.6 million (year ended December 31, 2015 – $18.9 million) to pay interest to holders of convertible debentures. (ii) Principal Redemption On April 1, 2016, the Company redeemed its remaining 5.25% Series G and 4.95% Series H convertible debentures at par. The full redemption price and any accrued interest owing on each series of convertible debentures was satisfied 50% by the issuance of common shares and 50% in cash. On December 22, 2016, the Company provided a notice of redemption to the holders of the remaining 5.40% Series E and 5.25% Series F convertible debentures that the entire principal amount outstanding plus accrued interest would be redeemed in cash on January 31, 2017. (iii) Normal Course Issuer Bid ("NCIB") Effective August 29, 2016, the Company renewed its NCIB for all of its then outstanding series of convertible debentures. The NCIB will expire on August 28, 2017 or such earlier date as First Capital Realty completes its purchases pursuant to the NCIB. All purchases made under the NCIB are at market prices prevailing at the time of purchase. For the year ended December 31, 2016 and 2015, principal amounts of convertible debentures purchased and amounts paid for the purchases are summarized in the table below: Year ended December 31 Total 2016 2015 Principal Amount Purchased 4,048 $ Amount Paid $ 4,102 $ Principal Amount Purchased 12,289 Amount Paid $ 12,436 43 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Shareholders’ Equity Shareholders’ equity amounted to $4.2 billion as at December 31, 2016, compared to $3.6 billion as at December 31, 2015. As at December 31, 2016, the Company had 243.5 million (December 31, 2015 – 225.5 million) issued and outstanding common shares with a stated capital of $3.1 billion (December 31, 2015 – $2.8 billion). During the year ended December 31, 2016, a total of 18.0 million common shares were issued as follows: 13.1 million from public offerings, 3.1 million shares from the redemption of the series G and H convertible debentures, 1.1 million shares from the exercise of common share options and 0.7 million shares for interest payments on convertible debentures. As at February 13, 2017, there were 243.5 million common shares outstanding. Share Purchase Options As at December 31, 2016, the Company had 4.2 million share purchase options outstanding, with an average exercise price of $18.15, which, if exercised, would result in the Company receiving proceeds of $76.3 million. Liquidity Liquidity risk exists due to the possibility of the Company not being able to generate sufficient cash flow, and/or not having access to sufficient debt and equity capital to fund its ongoing operations and growth and to refinance or meet existing payment obligations. The Company manages its liquidity risk by staggering debt maturities, renegotiating expiring credit arrangements proactively, using revolving credit facilities, maintaining a large pool of unencumbered assets, and issuing equity when deemed appropriate. Sources of liquidity primarily consist of cash flow from operations, cash and cash equivalents, and available capacity under the Company’s existing revolving credit facilities. If necessary, the Company is also able to obtain financing on its unencumbered assets. The following table summarizes the Company's liquidity position: As at (millions of dollars) Total available under credit facilities Cash and cash equivalents Unencumbered aggregate assets December 31, 2016 December 31, 2015 $ $ $ 809 12 6,627 $ $ $ 673 9 5,783 The Company has historically used mortgages, credit facilities, senior unsecured debentures, convertible debentures and equity issuances to finance its growth and repay debt. The actual level and type of future borrowings will be determined based on prevailing interest rates, various costs of debt and equity capital, capital market conditions and Management’s view of the appropriate leverage in the business. Management believes that it has sufficient resources to meet its operational and investing requirements in the near and longer term based on the availability of capital in various markets. Planned and completed financings subsequent to December 31, 2016, and availability on existing credit facilities, address substantially all of the contractual 2017 debt maturities and contractually committed costs to complete current development projects. Cash Flows Cash flow from operating activities represents the Company's primary source of liquidity for servicing debt and funding planned revenue sustaining expenditures, corporate expenses and dividends to shareholders. Interest and other income and cash on hand are other sources of liquidity. Cash provided by operating activities Cash provided by (used in) financing activities Cash used in investing activities Net change in cash and cash equivalents Three months ended December 31 Year ended December 31 2016 96,950 (80,571) (101,475) $ 2015 84,757 3,913 (99,197) $ 2016 256,598 326,958 (570,217) (85,096) $ (10,527) $ 13,339 $ $ 2015 244,433 63,572 (342,392) (34,387) $ $ FIRST CAPITAL REALTY ANNUAL REPORT 2016 44 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Adjusted cash flow from operating activities is not a measure defined by IFRS. Management defines this measure as cash flow from operating activities adjusted for the net change in non-cash operating items, receipt of proceeds from sales of residential inventory and expenditures on residential development inventory. Three months ended December 31 2015 2016 Cash provided by operating activities Net change in non-cash operating items Expenditures on residential development inventory Adjusted cash flow from operating activities $ $ 96,950 (27,475) — 69,475 $ $ 84,757 (17,554) — 67,203 $ $ Year ended December 31 2015 2016 244,433 256,598 (563) 8,706 52 — 243,922 265,304 $ $ For the year ended December 31, 2016, adjusted cash flow from operating activities improved by $21.4 million primarily due to higher NOI of $12.1 million, lower cash restructuring costs of $4.0 million and higher interest and other income of $1.9 million. Contractual Obligations An analysis of the Company’s contractual maturities of its material financial liabilities and other contractual commitments, at its proportionate share, as at December 31, 2016 is set out below: Scheduled mortgage principal amortization Mortgage principal repayments on maturity Credit facilities and bank indebtedness Senior unsecured debentures Convertible debentures Interest obligations (1) Land leases (expiring between 2023 and 2061) Contractually committed costs to complete current development projects Other committed costs Total contractual obligations (2) Payments due by period 2017 2018 to 2019 2020 to 2021 Thereafter Total $ 28,210 $ 82,902 63,510 250,000 108,147 161,771 964 59,802 46,014 $ 38,378 $ 46,692 $ 233,784 61,318 300,000 — 268,151 1,958 5,818 119,255 199,365 350,000 — 199,463 1,968 — 446,302 — 1,650,000 — 206,467 15,219 — 159,294 882,243 324,193 2,550,000 108,147 835,852 20,109 65,620 — $ 755,306 $ 15,806 932,849 $ — 15,806 908,429 $ 2,364,680 $ 4,961,264 — (1) Interest obligations include expected interest payments on mortgages and credit facilities as at December 31, 2016 (assuming balances remain outstanding through to maturity) and senior unsecured debentures, as well as standby credit facility fees. (2) The Company has the option to satisfy its obligations of principal and interest payments in respect of all of its outstanding convertible debentures by the issuance of common shares and, as such, convertible debentures have been excluded from this table unless the Company has disclosed its intention to settle in cash. The Company has $48.2 million of bank overdrafts and outstanding letters of credit issued by financial institutions to support certain of the Company’s contractual obligations. The Company’s estimated cost to complete properties currently under development is $167.5 million, of which $65.6 million is contractually committed. The balance of the costs to complete will only be committed once leases are signed and/or construction is underway. These contractual and potential obligations primarily consist of construction contracts and additional planned development expenditures and are expected to be funded in the normal course as the work is completed. Contingencies The Company is involved in litigation and claims which arise from time to time in the normal course of business. In the opinion of Management, none of these contingencies, individually or in the aggregate, would result in a liability that would have a material adverse effect on the financial position of the Company. The Company is contingently liable, jointly and severally, for approximately $108.1 million (December 31, 2015 – $78.4 million) to various lenders in connection with certain obligations, including loans advanced to its partners secured by the partners’ interest in the entity and underlying assets. 45 FIRST CAPITAL REALTY ANNUAL REPORT 2016 DIVIDENDS The Company has paid regular quarterly dividends to common shareholders since it commenced operations as a public company in 1994. Dividends on the common shares are declared at the discretion of the Board of Directors and are set from time to time after taking into consideration the Company’s capital requirements, its alternative sources of capital and common industry cash distribution practices. (in dollars) Dividend per common share Three months ended December 31 Year ended December 31 2016 0.215 $ 2015 0.215 $ $ 2016 0.86 $ 2015 0.86 SUMMARY OF FINANCIAL RESULTS OF LONG-TERM DEBT GUARANTORS The Company's senior unsecured debentures are guaranteed by the wholly owned subsidiaries of First Capital Realty, other than nominee subsidiaries and inactive subsidiaries. All such current and future wholly owned subsidiaries will provide a guarantee of the debentures. In the case of default by First Capital Realty, the indenture trustee will, subject to the indenture, be entitled to seek redress from such wholly owned subsidiaries for the guaranteed obligations in the same manner and upon the same terms that it may seek to enforce the obligations of First Capital Realty. These guarantees are intended to eliminate structural subordination, which arises as a consequence of a significant portion of First Capital Realty’s assets being held in various subsidiaries. The following tables present select consolidating summary information for the Company for the periods identified below presented separately for (i) First Capital Realty (denoted as FCR); (ii) guarantor subsidiaries; (iii) non-guarantor subsidiaries; (iv) consolidation adjustments; and (v) the total consolidated amounts. (millions of dollars) Year ended December 31 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Property rental revenue $ NOI Net income attributable to common shareholders (millions of dollars) Current assets Non-current assets Current liabilities Non-current liabilities FCR (1) 285 $ 178 Guarantors (2) Non-Guarantors (3) Consolidation Adjustments (4) Total Consolidated 267 $ 170 407 $ 224 403 $ 224 9 $ 4 8 $ 5 (25) $ 16 (23) $ 11 676 $ 422 383 203 324 268 15 16 (339) (283) 383 655 410 204 FCR (1) Guarantors (2) Non-Guarantors (3) As at December 31, 2016 Consolidation Adjustments (4) Total Consolidated $ 355 $ 398 $ 28 $ (607) $ 8,832 841 4,112 5,699 489 1,821 379 4 164 (5,979) (605) (1,955) 174 8,931 729 4,142 (1) This column accounts for investments in all subsidiaries of FCR under the equity method. (2) This column accounts for investments in subsidiaries of FCR other than the guarantors under the equity method. (3) This column accounts for investments in all subsidiaries of FCR other than guarantors on a combined basis. (4) This column includes the necessary amounts to eliminate the inter-company balances between FCR, the guarantors, and other subsidiaries to arrive at the information for the Company on a consolidated basis. FIRST CAPITAL REALTY ANNUAL REPORT 2016 46 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued (millions of dollars) Current assets Non-current assets Current liabilities Non-current liabilities FCR (1) Guarantors (2) Non-Guarantors (3) As at December 31, 2015 Consolidation Adjustments (4) Total Consolidated $ 135 $ 230 $ 23 $ (218) $ 7,715 559 3,623 4,910 210 589 334 263 89 (4,851) (584) (138) 170 8,108 448 4,163 (1) This column accounts for investments in all subsidiaries of FCR under the equity method. (2) This column accounts for investments in subsidiaries of FCR other than the guarantors under the equity method. (3) This column accounts for investments in all subsidiaries of FCR other than guarantors on a combined basis. (4) This column includes the necessary amounts to eliminate the inter-company balances between FCR, the guarantors, and other subsidiaries to arrive at the information for the Company on a consolidated basis. RELATED PARTY TRANSACTIONS Significant Shareholder Gazit-Globe Ltd. (“Gazit”) is a significant shareholder of the Company, and, as of December 31, 2016, beneficially owned 36.4% (December 31, 2015 – 42.2%) of the common shares of the Company. Norstar Holdings Inc. is the ultimate controlling party of Gazit. Corporate and other amounts receivable include amounts due from Gazit. Gazit reimburses the Company for certain accounting and administrative services provided to it by the Company. Effective April 3, 2016, a shareholders’ agreement between Gazit and Alony-Hetz Properties and Investments Ltd. (‘‘Alony-Hetz’’) was terminated and Mr. Nathan Hetz, the Chief Executive Officer and a director of Alony-Hetz, stepped down from the Board of Directors of First Capital Realty on April 4, 2016. As of March 31, 2016, the last date that Alony- Hetz reported its shareholdings to First Capital Realty, it beneficially owned 6.2% of the common shares of the Company. Pursuant to the terminated shareholders’ agreement, among other terms, (i) Gazit agreed to vote its common shares of the Company in favour of the election of up to two representatives of Alony-Hetz to the Board of Directors of the Company, and (ii) Alony-Hetz agreed to vote its common shares of the Company as directed by Gazit with respect to the election of the remaining directors of the Company. Joint Venture During the three months and year ended December 31, 2016, a subsidiary of Main and Main Developments earned property-related and asset management fees from Main and Main Urban Realty, which are included in interest and other income on a proportionate basis in the amount of $1.2 million and $2.6 million (December 31, 2015 – $0.8 million and $1.7 million). Subsidiaries of the Company The audited annual consolidated financial statements include the financial statements of First Capital Realty and First Capital Holdings Trust. First Capital Holdings Trust is the only significant subsidiary of First Capital Realty and is wholly owned by the Company. SUBSEQUENT EVENTS Redemption of Convertible Debentures On January 31, 2017, the Company redeemed its remaining 5.40% Series E and 5.25% Series F convertible debentures at par. The full redemption price and any accrued interest owing on each series of convertible debentures was satisfied in cash. First Quarter Dividend The Company announced that it will pay a first quarter dividend of $0.215 per common share on April 11, 2017 to shareholders of record on March 29, 2017. 47 FIRST CAPITAL REALTY ANNUAL REPORT 2016 QUARTERLY FINANCIAL INFORMATION (share counts in thousands) Property rental revenue Net operating income Net income attributable to common shareholders Net income per share attributable to common shareholders: Basic Diluted Weighted average number of diluted common shares outstanding – IFRS Cash provided by operating activities Operating FFO Operating FFO per diluted share FFO FFO per diluted share Weighted average number of diluted common shares outstanding – FFO Operating AFFO Operating AFFO per diluted share AFFO AFFO per diluted share Weighted average number of diluted shares outstanding – AFFO Dividend Total assets 2016 2015 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 $ 172,731 $ 167,877 $ 167,576 $ 168,100 $ 164,244 $ 160,639 $ 166,249 $ 163,661 106,306 107,612 105,083 102,996 103,295 102,585 104,233 99,780 57,739 88,464 169,556 66,957 38,947 24,750 94,267 45,901 $ $ $ $ $ $ $ $ $ $ $ $ 0.24 0.24 252,602 96,950 66,239 0.27 66,824 0.27 244,554 67,277 0.27 67,940 0.27 $ $ $ $ $ $ $ $ $ $ $ 0.37 0.36 250,596 68,607 68,789 0.29 67,451 0.28 240,708 67,756 0.27 67,756 0.27 $ $ $ $ $ $ $ $ $ $ $ 0.73 0.71 243,235 42,704 64,200 0.28 66,368 0.29 233,014 63,383 0.28 66,533 0.28 $ $ $ $ $ $ $ $ $ $ $ 0.30 0.29 243,467 48,339 61,504 0.27 61,902 0.27 226,692 62,563 0.26 62,642 0.26 $ $ $ $ $ $ $ $ $ $ $ 0.17 0.17 226,537 84,757 58,424 0.26 58,848 0.26 226,537 59,498 0.25 59,498 0.25 $ $ $ $ $ $ $ $ $ $ $ 0.11 0.11 225,536 59,811 61,651 0.27 47,477 0.21 225,537 62,306 0.26 62,306 0.26 $ $ $ $ $ $ $ $ $ $ $ 0.42 0.41 241,494 62,172 60,940 0.27 59,509 0.27 223,298 63,905 0.27 63,824 0.27 $ $ $ $ $ $ $ $ $ $ $ 0.21 0.21 223,652 37,696 55,054 0.25 55,432 0.25 220,861 57,095 0.24 57,960 0.24 253,119 249,282 241,598 240,440 240,409 239,504 237,381 237,315 0.215 $ 0.215 $ 0.215 $ 0.215 $ 0.215 $ 0.215 $ 0.215 $ 0.215 $ 9,104,553 $ 9,068,841 $ 8,690,655 $ 8,387,567 $ 8,278,526 $ 8,212,411 $ 8,124,267 $ 8,022,510 Total mortgages and credit facilities 1,248,646 1,277,697 1,272,977 1,322,909 1,248,637 1,201,018 1,094,150 1,093,808 Shareholders’ equity Other Number of properties Gross leasable area (in thousands) Total portfolio occupancy % 4,195,263 4,171,426 3,961,179 3,666,239 3,639,952 3,645,911 3,660,290 3,566,144 160 159 161 160 158 158 157 157 25,278 25,137 25,238 24,800 24,431 24,256 24,270 24,238 95.0% 95.0% 95.2% 95.0% 94.8% 94.7% 94.7% 95.6% CRITICAL ACCOUNTING ESTIMATES The Company makes estimates and assumptions that affect the carrying amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amount of earnings for the reporting periods. Actual results could differ from those estimates. Management believes that the policies that are most subject to estimation and Management’s judgment are those outlined below. Judgments Investment properties In applying the Company’s policy with respect to investment properties, judgment is applied in determining whether certain costs are additions to the carrying amount of the property and, for properties under development, identifying the point at which capitalization of borrowing and other costs ceases. Judgment is also applied in determining the extent and frequency of external and internal appraisals in order to estimate fair values and value updates. FIRST CAPITAL REALTY ANNUAL REPORT 2016 48 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued Hedge accounting Where the Company undertakes to apply cash flow hedge accounting, it must determine whether such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the reporting periods for which they were designated. Income taxes The Company exercises judgment in estimating deferred tax assets and liabilities. Income tax laws may be subject to different interpretations, and the income tax expense recorded by the Company reflects the Company’s interpretation of the relevant tax laws. The Company is also required to estimate the timing of reversals of temporary differences between accounting and taxable income in determining the appropriate rate to apply in calculating deferred taxes. Estimates and Assumptions Valuation of Investment properties The fair value of investment properties is determined by Management using the following three approaches at the end of each reporting period: 1. External appraisals – by an independent national appraisal firm, in accordance with professional appraisal standards and IFRS. On an annual basis, the Company has a minimum threshold of approximately 25% (as measured by fair value) of the property portfolio requiring external appraisal. Consequently, the entire portfolio is externally appraised at least once within a four-year cycle. 2. Internal appraisals – by certified staff appraisers employed by the Company, in accordance with professional appraisal standards and IFRS. 3. Value updates – primarily consisting of management's review of the key assumptions from previous appraisals and updating the value for changes in the property cash flow, physical condition and changes in market conditions. Shopping centres are appraised primarily based on an income approach that reflects stabilized cash flows or net operating income from existing tenants with the property in its existing state, since purchasers typically focus on expected income. External and internal appraisals are conducted using and placing reliance on both the direct capitalization method and the discounted cash flow method (including the estimated proceeds from a potential future disposition). Value updates use the direct capitalization method. Properties undergoing development, redevelopment or expansion are valued either (i) using the stabilized net operating income expected upon completion, with a deduction for costs to complete the project, or (ii) using the discounted cash flow method. Capitalization rates, discount rates and terminal rates, as applicable, are adjusted to reflect lease-up assumptions and construction risk, when appropriate. Adjacent land parcels held for future development are valued based on comparable sales of commercial land. The primary method of appraisal for development land is the comparable sales approach, which considers recent sales activity for similar land parcels in the same or similar markets to estimate a value on either a per acre basis or on a basis of per square foot buildable. Such values are applied to the Company's properties after adjusting for factors specific to the site, including its location, zoning, servicing and configuration. Refer to Note 2(f) of the audited consolidated financial statements for the year ended December 31, 2016 for further information on the estimates and assumptions made by Management in connection with the fair values of investment properties. Valuation of Financial Instruments The Company is required to determine the fair value of its loans, mortgages and credit facilities, senior unsecured and convertible debentures payable, loans and mortgages receivable, marketable securities and derivatives. The fair values of the convertible debentures and marketable securities are based on quoted market prices. The fair values of the other financial instruments are calculated using internally developed models as follows: • Mortgages and credit facilities are calculated based on market interest rates plus a risk-adjusted spread on discounted cash flows. 49 FIRST CAPITAL REALTY ANNUAL REPORT 2016 • Senior unsecured debentures are based on closing bid risk-adjusted spreads and current underlying Government of Canada bond yields on discounted cash flows, also incorporating interest rate quotations provided by financial institutions. • Derivative instruments are determined using present value forward pricing and swap calculations at interest rates that reflect current market conditions. • Loans and mortgages receivable are calculated based on current market rates plus borrower level risk-adjusted spreads on discounted cash flows, adjusted for allowances for non-payment and collateral related risk. Estimates of risk-adjusted credit spreads applicable to a specific financial instrument and its underlying collateral could vary and result in a different disclosed fair value. Income Taxes For the determination of deferred tax assets and liabilities where investment property is measured using the fair value model, the presumption is that the carrying amount of an investment property is recovered through sale, as opposed to presuming that the economic benefits of the investment property will be substantially consumed through use over time. Additional critical accounting estimates and assumptions include those used for determining the allocation of convertible debentures liability and equity components, assessing the allowance for doubtful accounts on trade receivables, and estimating the fair value of share-based compensation. FUTURE ACCOUNTING POLICY CHANGES The IASB has issued new standards and amendments to existing standards. These changes are not yet adopted by the Company and could have an impact on future periods. These changes are described in detail below: Financial instruments IFRS 9, “Financial Instruments” (“IFRS 9”), was issued in July 2014, and replaces IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 addresses the classification and measurement of all financial assets and financial liabilities within the scope of the current IAS 39 and introduced a new expected credit loss impairment model that will require more timely recognition of expected credit losses and a substantially reformed model for hedge accounting. Also included are the requirements to measure debt-based financial assets at either amortized cost or fair value through profit or loss (“FVTPL”) and to measure equity-based financial assets as either held-for-trading or fair value through other comprehensive income (“FVTOCI”). No amounts are reclassified out of other comprehensive income (“OCI”) if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no longer be bifurcated and accounted for separately under IFRS 9. The revised hedge accounting model permits additional hedging strategies used for risk management to qualify for hedge accounting. IFRS 9 is required for annual periods beginning on or after January 1, 2018. The Company is in the process of assessing the impact of IFRS 9 on its consolidated financial statements. Revenue from contracts with customers IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”), was issued in May 2014, and replaces IAS 11, “Construction Contracts”, IAS 18, “Revenue Recognition”, IFRIC 13, “Customer Loyalty Programmes”, IFRIC 15, “Agreements for the Construction of Real Estate”, IFRIC 18, “Transfers of Assets from Customers”, and SIC-31, “Revenue – Barter Transactions Involving Advertising Services”. IFRS 15 provides a single, principles-based five-step model that will apply to all contracts with customers with limited exceptions, including, but not limited to, leases within the scope of IAS 17 “Leases”; financial instruments and other contractual rights or obligations within the scope of IFRS 9, IFRS 10, “Consolidated Financial Statements”, and IFRS 11, “Joint Arrangements”. In addition to the five-step model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The incremental costs of obtaining a contract must be recognized as an asset if the Company expects to recover these costs. The standard’s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the Company’s ordinary activities. FIRST CAPITAL REALTY ANNUAL REPORT 2016 50 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued IFRS 15 is required for annual periods beginning on or after January 1, 2018. Earlier adoption is permitted. The Company is in the process of assessing the impact of IFRS 15 on its consolidated financial statements. Leases IFRS 16, “Leases” (“IFRS 16”), was issued in January 2016, and replaces IAS 17, “Leases” (“IAS 17”). IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Certain leases will be exempt from these requirements. The most significant effect expected of the new requirements will be an increase in lease assets and financial liabilities for lessees with material off-balance sheet leases. Lessor accounting requirements under IFRS 16 are carried forward from IAS 17 and accordingly, leases will continue to be classified and accounted for as operating or finance leases by lessors. IFRS 16 is required for annual periods beginning on or after January 1, 2019. Earlier adoption is permitted. The Company does not expect any significant impact on its consolidated financial statements. Investment property The amendments to IAS 40, "Investment Property", clarify the accounting guidance and evidence required when an entity transfers to, or from, investment property. The amendments are effective for annual periods beginning on or after January 1, 2018. The Company does not expect any significant impact on its consolidated financial statements. CONTROLS AND PROCEDURES As at December 31, 2016, the Chief Executive Officer and the Chief Financial Officer of the Company, with the assistance of other staff and Management of the Company to the extent deemed necessary, have designed the Company’s disclosure controls and procedures to provide reasonable assurance that information required to be disclosed in the various reports filed or submitted by the Company under securities legislation is recorded, processed, summarized and reported accurately and have designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. In the design of its internal controls over financial reporting, the Company used the 2013 framework published by the Committee of Sponsoring Organizations of the Treadway Commission. The Chief Executive Officer and the Chief Financial Officer of the Company have evaluated, or caused the evaluation of, under their supervision, the effectiveness of the Company’s disclosure controls and procedures and its internal controls over financial reporting (each as defined in National Instrument 52-109-Certification of Disclosure in Issuers’ Annual and Interim Filings) as at December 31, 2016, and have concluded that such disclosure controls and procedures and internal controls over financial reporting were operating effectively. The Company did not make any changes in its internal controls over financial reporting during the quarter ended December 31, 2016 that have had, or are reasonably likely to have, a material effect on the Company's internal controls over financial reporting. On an ongoing basis, the Company will continue to analyze its controls and procedures for potential areas of improvement. Management does recognize that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance and not absolute assurance of achieving the desired control objectives. In the unforeseen event that lapses in the disclosure controls and procedures or internal controls over financial reporting occur and/or mistakes happen, the Company intends to take the necessary steps to minimize the consequences thereof. 51 FIRST CAPITAL REALTY ANNUAL REPORT 2016 RISKS AND UNCERTAINTIES First Capital Realty, as an owner of income-producing properties and development properties, is exposed to numerous business risks in the normal course of its business that can impact both short- and long-term performance. Income- producing and development properties are affected by general economic conditions and local market conditions such as oversupply of similar properties or a reduction in tenant demand. It is the responsibility of Management, under the supervision of the Board of Directors, to identify and, to the extent possible, mitigate or minimize the impact of all such business risks. The major categories of risk the Company encounters in conducting its business and some of the actions it takes to mitigate these risks are outlined below. The Company’s most current Annual Information Form, which provides a detailed description of these and other risks that may affect the Company, can be found on SEDAR at www.sedar.com and on the Company’s website at www.fcr.ca. Economic Conditions and Ownership of Real Estate Real property investments are affected by various factors including changes in general economic conditions (such as the availability of long-term mortgage financings, fluctuations in interest rates and unemployment levels) and in local market conditions (such as an oversupply of space or a reduction in demand for real estate in the area), the attractiveness of the properties to tenants, competition from other real estate developers, managers and owners in seeking tenants, the ability of the owner to provide adequate maintenance at an economic cost, and various other factors. The economic conditions in the markets in which the Company operates can also have a significant impact on the Company’s tenants and, in turn, the Company’s financial success. Adverse changes in general or local economic conditions can result in some retailers being unable to sustain viable businesses and meet their lease obligations to the Company, and may also limit the Company’s ability to attract new or replacement tenants. The Company’s portfolio has major concentrations in Ontario, Alberta, Quebec and British Columbia. Moreover, within each of these provinces, the Company’s portfolio is concentrated predominantly in selected urban markets. As a result, economic and real estate conditions in these regions will significantly affect the Company’s revenues and the value of its properties. Revenue from the Company’s properties depends primarily on the ability of the Company’s tenants to pay the full amount of rent and other charges due under their leases on a timely basis. Leases comprise any agreements relating to the occupancy or use of the Company’s real property. There can be no assurance that tenants and other parties will be willing or able to perform their obligations under any such leases. If a significant tenant or a number of smaller tenants were to become unable or unwilling to meet their obligations to the Company, the Company’s financial position and results of operations would be adversely affected. In the event of default by a tenant, the Company may experience delays and unexpected costs in enforcing its rights as landlord under lease terms, which may also adversely affect the Company’s financial position and results of operations. The Company may also incur significant costs in making improvements or repairs to a property required in order to re-lease vacated premises to a new tenant. The Company’s portfolio has more concentration with certain tenants. In the event that one or more tenants that individually or collectively account for an important amount of the Company’s annual minimum rent experience financial difficulty and are unable to pay rent or fulfill their lease commitments, the Company’s financial position, results of operation and the value of its properties concerned would be adversely affected. First Capital Realty’s net income could be adversely affected in the event of a downturn in the business, or the bankruptcy or insolvency, of any anchor store or anchor tenant. Anchor tenants generally occupy large amounts of leasable area, pay a significant portion of the total rents at a property and contribute to the success of other tenants by drawing significant numbers of customers to a property. The closing of one or more anchor stores at a property could have a significant adverse effect on that property. Lease Renewals and Rental Increases Upon the expiry of any lease, there can be no assurance that the lease will be renewed or the tenant replaced. Expiries of certain leases will occur in both the short and long term, including expiry of leases of certain significant tenants, and although certain lease renewals and/or rental increases are expected to occur in the future, there can be no assurance that such renewals or rental increases will in fact occur. The failure to achieve renewals and/or rental increases may have FIRST CAPITAL REALTY ANNUAL REPORT 2016 52 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued an adverse effect on the financial position and results of operations of the Company. In addition, the terms of any subsequent lease may be less favourable to the Company than the existing lease. Financing, Interest Rates, Repayment of Indebtedness and Access to Capital The Company has outstanding indebtedness in the form of mortgages, loans, credit facilities, senior unsecured debentures and convertible debentures and, as such, is subject to the risks normally associated with debt financing, including the risk that the Company’s cash flow will be insufficient to meet required payments of principal and interest. The amount of indebtedness outstanding could require the Company to dedicate a substantial portion of its cash flow from operations to service its debt, thereby reducing funds available for operations, acquisitions, development activities and other business opportunities that may arise. There is a possibility that the Company’s internally generated cash may not be sufficient to repay all of its outstanding indebtedness. Upon the expiry of the term of the financing on any particular property owned by the Company, refinancing on a conventional mortgage loan basis may not be available in the amount required or may be available only on terms less favourable to the Company than the existing financing. The Company may elect to repay certain indebtedness through the issuance of equity securities or the sale of assets, where appropriate. Interest rates have a significant effect on the profitability of commercial properties as interest represents a significant cost in the ownership of real property where debt financing is used as a source of capital. The Company has a total of $1,024.0 million principal amount of fixed rate interest-bearing instruments outstanding including mortgages, senior unsecured debentures and convertible debentures maturing between January 1, 2017 and December 31, 2019 at a weighted average coupon interest rate of 5.5%. If these amounts were refinanced at an average interest rate that was 100 basis points higher or lower than the existing rate, the Company’s annual interest cost would respectively increase or decrease by $10.2 million. In addition, as at December 31, 2016, the Company had $324.2 million principal amount of debt (or 8% of the Company’s aggregate debt as of such date) at floating interest rates. The Company seeks to reduce its interest rate risk by staggering the maturities of long-term debt and limiting the use of floating rate debt so as to minimize exposure to interest rate fluctuations. Moreover, from time to time, the Company may enter into interest rate swap transactions to modify the interest rate profile of its current or future variable rate debts without an exchange of the underlying principal amount. Credit Ratings Any credit rating that is assigned to the senior unsecured debentures may not remain in effect for any given period of time or may be lowered, withdrawn or revised by one or more of the rating agencies if, in their judgment, circumstances so warrant. Refer to “Corporate Structure - Credit Ratings”. Any lowering, withdrawal or revision of a credit rating may have an adverse effect on the market price of the senior unsecured debentures and the other securities of the Company, may adversely affect a securityholder’s ability to sell its senior unsecured debentures or other securities of the Company and may adversely affect the Company’s access to financial markets and its cost of borrowing. Acquisition, Expansion, Development, Redevelopment and Strategic Dispositions The Company’s acquisition and investment strategy and market selection process may not ultimately be successful and may not provide positive returns on investment. The acquisition of properties or portfolios of properties entails risks that include the following, any of which could adversely affect the Company’s financial position and results of operations and its ability to meet its obligations: (i) the Company may not be able to identify suitable properties to acquire or may be unable to complete the acquisition of the properties identified; (ii) the Company may not be able to successfully integrate any acquisitions into its existing operations; (iii) properties acquired may fail to achieve the occupancy or rental rates projected at the time of the acquisition decision, which may result in the properties’ failure to achieve the returns projected; (iv) the Company’s pre-acquisition evaluation of the physical condition of each new investment may not detect certain defects or identify necessary repairs, which could significantly increase the Company’s total acquisition costs; (v) the Company’s investigation of a property or building prior to acquisition, may fail to reveal various liabilities, which could reduce the cash flow from the property or increase its acquisition cost; and (vi) representations and warranties obtained from third party vendors may not adequately protect against unknown, unexpected or undisclosed liabilities and any recourse against such vendors may be limited by the financial capacity of such vendors. 53 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Further, the Company’s development and redevelopment commitments are subject to those risks usually attributable to construction projects, which include: (i) construction or other unforeseen delays; (ii) cost overruns; (iii) the failure of tenants to occupy and pay rent in accordance with existing lease agreements, some of which are conditional; (iv) the inability to achieve projected rental rates or anticipated pace of lease-ups; and (v) an increase in interest rates during the life of the development or redevelopment. Where the Company’s development commitments relate to properties intended for sale, such as the residential portion of certain projects, the Company is also subject to the risk that purchasers of such properties may become unable or unwilling to meet their obligations to the Company or that the Company may not be able to close the sale of a significant number of units in a development project on economically favourable terms. In addition, the Company undertakes strategic property dispositions from time to time in order to recycle its capital and maintain an optimal portfolio composition. The Company may be subject to unexpected costs or liabilities related to such dispositions, which could adversely affect the Company's financial position and results of operations and its ability to meet its obligations. Competition The real estate business is competitive. Numerous other developers, managers and owners of retail properties compete with the Company in seeking tenants. Some of the properties located in the same markets as the Company’s properties may be newer, better located and/or have stronger anchor tenants than the Company’s properties. The existence of developers, managers and owners in the markets in which the Company operates, or any increase in supply of available space in such markets (due to new construction, tenant insolvencies or other vacancy) and competition for the Company’s tenants could adversely affect the Company’s ability to lease space in its properties in such markets and on the rents charged or concessions granted. In addition, the internet and other technologies increasingly play a more significant role in consumer preferences and shopping patterns, which presents an evolving competitive risk to the Company that is not easily assessed. Any of the aforementioned factors could have an adverse effect on the Company’s financial position and results of operations. Residential Development Sales and Leasing The Company is and expects to be increasingly involved in the development of mixed-use properties that include residential condominiums and rental apartments. These developments are often carried out with an experienced residential developer as the Company's partner. Purchaser demand for residential condominiums is cyclical and is significantly affected by changes in general and local economic and industry conditions, such as employment levels, availability of financing for homebuyers, interest rates, consumer confidence, levels of new and existing homes for sale, demographic trends and housing demand. As a residential landlord in its properties that include rental apartments, the Company is subject to the risks inherent in the multi-unit residential rental property industry. In addition to the risks highlighted above, these include exposure to private individual tenants (as opposed to commercial tenants in the Company's retail properties), fluctuations in occupancy levels, the inability to achieve economic rents (including anticipated increases in rent), controlling bad debt exposure, rent control regulations, increases in operating costs including the costs of utilities (residential leases are often “gross” leases under which the landlord is not able to pass on costs to its residents), the imposition of increased taxes or new taxes and capital investment requirements. Environmental Matters The Company maintains comprehensive environmental insurance and conducts environmental due diligence upon the acquisition of new properties. There is, however, a risk that the value of any given property in the Company’s portfolio could be adversely affected as a result of unforeseen or uninsured environmental matters or changes in governmental regulations. Under various federal, provincial and local laws, the Company, as an owner, and potentially as a person in control of or managing real property, could potentially be liable for costs of investigation, remediation and monitoring of certain contaminants, hazardous or toxic substances present at or released from its properties or disposed of at other locations, whether the Company knows of, or is responsible for, the environmental contamination and whether the contamination occurred before or after the Company acquired the property. The costs of investigation, removal or remediation of FIRST CAPITAL REALTY ANNUAL REPORT 2016 54 MANAGEMENT’S DISCUSSION AND ANALYSIS – continued hazardous or toxic substances are not estimable, may be substantial and could adversely affect the Company’s results of operations or financial position. The presence of contamination or the failure to remediate such substances, if any, may adversely affect the Company’s ability to sell such real estate or to borrow using such real estate as collateral and could potentially also result in claims, including proceedings by government regulators or third-party lawsuits. Environmental legislation can change rapidly and the Company may become subject to more stringent environmental laws in the future, and compliance with more stringent environmental laws, or increased enforcement of the same, could have a material adverse effect on its business, financial position or results of operations. Partnerships The Company has investments in properties with non-affiliated partners through partnership, co-ownership and limited liability corporate venture arrangements (collectively, “partnerships”). As a result, the Company does not control all decisions regarding those properties and may be required to take actions that are in the interest of the partners collectively, but not in the Company’s sole best interests. Accordingly, the Company may not be able to favourably resolve any issues that arise with respect to such decisions, or the Company may have to take legal action or provide financial or other inducements to partners to obtain such resolution. In addition, the Company may be exposed to risks resulting from the actions, omissions or financial situation of a partner, which may result in harm to the Company’s reputation or adversely affect the value of the Company’s investments. Significant Shareholders As of December 31, 2016, Chaim Katzman, a director (formerly the Chairman of the Board of the Company), and several of the Company's shareholders affiliated with Mr. Katzman (the “Gazit Group”), including Gazit-Globe and related entities, beneficially owned approximately 36.4% of the outstanding Common Shares. Gazit-Globe is a public company listed on the Toronto Stock Exchange, the New York Stock Exchange and the Tel-Aviv Stock Exchange. Additional information concerning Gazit-Globe is available in its public disclosure. Dori J. Segal, the Chairman of the Board of the Company, is also the Vice Chairman and Chief Executive Officer of each of Gazit-Globe and its controlling shareholder, Norstar Holdings Inc., a corporation listed on the Tel-Aviv Stock Exchange ("Norstar"). Mr. Katzman as well as Mr. Segal and his spouse, directly and indirectly, own shares of Norstar and they have entered into a shareholders' agreement with Mr. Katzman under which they have agreed, among other things, to vote for certain nominees to, and to constitute, the board of Norstar in an agreed manner. The market price of the common shares could decline materially if the Company's significant shareholders sell some or all of their Common Shares or are perceived by the market as intending to sell such common shares. In addition, so long as the Gazit Group maintains a significant interest in the Company, it may be able to exercise significant influence over the outcome of any matter submitted to a vote of shareholders of the Company which requires the approval of a simple majority of shareholders voting at the meeting. The Gazit Group will also be able to exercise significant influence in the event of a take-over bid for First Capital Realty. This level of ownership may discourage third parties from seeking to acquire control of the Company, which in turn may adversely affect the market price of the Common Shares. Moreover, members of the Gazit Group have pledged a substantial portion of their common shares to secure revolving credit facilities made available to them by commercial banks. The occurrence of an event of default thereunder could result in a sale of such pledged Common Shares that would trigger an effective change of control of First Capital Realty, even when such a change may not be in the best interests of the shareholders of the Company or may have a material adverse effect on the Company. The foregoing information regarding the Gazit Group has been provided by the Gazit Group and has not been independently verified. There can be no assurances that such information is complete, and as such there may be additional relevant information not included in the foregoing. 55 FIRST CAPITAL REALTY ANNUAL REPORT 2016 FS CONSOLIDATED FINANCIAL STATEMENTS Table of Contents 57 58 59 60 61 62 63 64 64 64 70 72 75 76 76 76 78 79 80 81 82 85 85 85 86 86 86 87 88 89 91 92 93 93 94 95 95 96 Management's Responsibility Independent Auditor's Report Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements 1 Description of the Company 2 Significant Accounting Policies 3 Adoption of New and Amended IFRS Pronouncements 4 Investment Properties 5 Loans, Mortgages and Other Real Estate Assets 6 Amounts Receivable 7 Other Assets 8 Capital Management 9 Mortgages and Credit Facilities 10 Senior Unsecured Debentures 11 Convertible Debentures 12 Accounts Payable and Other Liabilities 13 Shareholders' Equity 14 Net Operating Income 15 Interest and Other Income 16 Interest Expense 17 Corporate Expenses 18 Other Gains (Losses) and (Expenses) 19 Income Taxes 20 Per Share Calculations 21 Risk Management 22 Fair Value Measurement 23 Investment in Joint Ventures 24 Subsidiary with Non-controlling Interest 25 Co-ownership Interests 26 Supplemental Other Comprehensive Income (Loss) Information 27 Supplemental Cash Flow Information 28 Commitments and Contingencies 29 Related Party Transactions 30 Subsequent Events Management’s Responsibility The Company’s consolidated financial statements and Management’s Discussion and Analysis (“MD&A”) are the responsibility of Management and have been prepared in accordance with International Financial Reporting Standards (“IFRS”). The preparation of consolidated financial statements and the MD&A necessarily involves the use of estimates based on Management’s judgment, particularly when transactions affecting the current accounting period cannot be finalized with certainty until future periods. In addition, in preparing this financial information, Management must make determinations as to the relevancy of information to be included, and estimates and assumptions that affect the reported information. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from the present assessment of this information because future events and circumstances may not occur as expected. The consolidated financial statements have been properly prepared within reasonable limits of materiality and in light of information available up to February 14, 2017. Management is also responsible for the maintenance of financial and operating systems, which include effective controls to provide reasonable assurance that the Company’s assets are safeguarded, transactions are properly authorized and recorded, and that reliable financial information is produced. The Board of Directors is responsible for ensuring that Management fulfills its responsibilities, including the preparation and presentation of the consolidated financial statements and all of the information in the MD&A, and the maintenance of financial and operating systems, through its Audit Committee, that is comprised of independent directors who are not involved in the day-to-day operations of the Company. Each quarter, the Audit Committee meets with Management and, as necessary, with the independent auditors, Ernst & Young LLP, to satisfy itself that Management’s responsibilities are properly discharged and to review and report to the Board of Directors on the consolidated financial statements. In accordance with generally accepted auditing standards, the independent auditors conduct an examination each year in order to express a professional opinion on the consolidated financial statements. Adam E. Paul President and Chief Executive Officer Toronto, Ontario February 14, 2017 Kay Brekken Executive Vice President and Chief Financial Officer 57 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Independent Auditors’ Report To the Shareholders of First Capital Realty Inc. We have audited the accompanying consolidated financial statements of First Capital Realty Inc., which comprise the consolidated balance sheets as at December 31, 2016 and 2015, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of First Capital Realty Inc. as at December 31, 2016 and 2015, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Toronto, Ontario February 14, 2017 FIRST CAPITAL REALTY ANNUAL REPORT 2016 58 Consolidated Balance Sheets As at (thousands of dollars) ASSETS Non-current Assets Real Estate Investments Investment properties – shopping centres Investment properties – development land Investment in joint ventures Loans, mortgages and other real estate assets Total real estate investments Other non-current assets Total non-current assets Current Assets Cash and cash equivalents Loans, mortgages and other real estate assets Residential development inventory Amounts receivable Other assets Investment properties classified as held for sale Total current assets Total assets LIABILITIES Non-current Liabilities Mortgages Credit facilities Senior unsecured debentures Convertible debentures Other liabilities Deferred tax liabilities Total non-current liabilities Current Liabilities Bank indebtedness Mortgages Credit facilities Senior unsecured debentures Convertible debentures Accounts payable and other liabilities Mortgages on investment properties classified as held for sale Total current liabilities Total liabilities EQUITY Shareholders’ equity Non-controlling interest Total equity Total liabilities and equity Refer to accompanying notes to the consolidated financial statements. Approved by the Board of Directors: Jon Hagan Director Adam E. Paul Director 59 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Note December 31, 2016 December 31, 2015 4 4 23 5 7 27(d) 5 6 7 4(d) 9 9 10 11 12 19 27(d) 9 9 10 11 12 4(d), 9 13 24 $ $ $ $ 8,370,298 67,149 146,422 324,979 8,908,848 21,997 8,930,845 12,217 28,316 5,010 21,175 23,940 90,658 83,050 173,708 9,104,553 878,008 243,696 2,296,551 103,765 27,076 593,293 4,142,389 15,914 109,167 7,785 249,891 103,868 232,466 719,091 9,990 729,081 4,871,470 4,195,263 37,820 4,233,083 9,104,553 $ $ $ $ 7,779,482 29,853 160,119 124,442 8,093,896 14,284 8,108,180 9,164 35,476 — 17,705 10,264 72,609 97,737 170,346 8,278,526 839,891 216,850 2,244,091 327,343 29,685 504,701 4,162,561 26,200 184,111 7,785 — — 229,555 447,651 — 447,651 4,610,212 3,639,952 28,362 3,668,314 8,278,526 Consolidated Statements of Income Year ended December 31 (thousands of dollars, except per share amounts) Property rental revenue Property operating costs Net operating income Other income and expenses Interest and other income Interest expense Corporate expenses Abandoned transaction costs Amortization expense Share of profit from joint ventures Other gains (losses) and (expenses) Increase (decrease) in value of investment properties, net Income before income taxes Deferred income taxes Net income Net income attributable to: Common shareholders Non-controlling interest Net income per share attributable to common shareholders: Basic Diluted Refer to accompanying notes to the consolidated financial statements. Note 2016 $ 676,284 $ 2015 654,792 244,900 409,892 17,702 (163,481) (35,660) (786) (2,892) 12,178 (15,155) 37,773 (150,321) 259,571 55,843 203,728 254,287 421,997 19,641 (158,687) (34,910) (321) (1,287) 12,437 (586) 218,078 54,365 476,362 90,570 385,792 $ 382,714 $ 203,865 3,078 (137) 385,792 $ 203,728 1.62 $ 1.59 $ 0.91 0.91 14 15 16 17 18 4 19 24 20 20 $ $ $ $ $ FIRST CAPITAL REALTY ANNUAL REPORT 2016 60 Consolidated Statements of Comprehensive Income (thousands of dollars) Net income Other comprehensive income (loss) Unrealized gain (loss) on available-for-sale marketable securities (1) Reclassification of gain (loss) on available-for-sale marketable securities to net income Unrealized gain (loss) on cash flow hedges (1) Reclassification of net losses on cash flow hedges to net income Deferred tax expense (recovery) Other comprehensive income (loss) Comprehensive income Comprehensive income attributable to: Common shareholders Non-controlling interest (1) Items that may subsequently be reclassified to net income. Refer to accompanying notes to the consolidated financial statements. Year ended December 31 Note 2016 2015 $ 385,792 $ 203,728 26 26 26 26 26 24 — — 5,790 1,518 7,308 1,944 5,364 $ $ $ 391,156 388,078 3,078 391,156 $ $ $ (34) 147 (12,232) 1,101 (11,018) (3,026) (7,992) 195,736 195,873 (137) 195,736 61 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Consolidated Statements of Changes in Equity (thousands of dollars) December 31, 2015 Changes during the year: Net income Issuance of common shares Issue costs, net of tax Dividends Interest on convertible debentures paid in common shares Redemption of convertible debentures Options, deferred share units, restricted share units, and performance share units, net Other comprehensive gain (loss) Contributions from (distributions to) non- controlling interest, net Accumulated Other Comprehensive Loss Retained Earnings Share Capital Contributed Surplus and Other Equity Items (Note 26(a)) (Note 13(a)) (Note 13(b)) Total Shareholders’ Equity Non- Controlling Interest Total Equity $ 844,382 $ (17,062) $ 2,768,983 $ 43,649 $ 3,639,952 $ 28,362 $ 3,668,314 382,714 — — (204,233) — — — — — — — — — — — — — 287,589 (9,036) — 13,645 60,294 20,924 — — — — — 382,714 287,589 (9,036) (204,233) 13,645 (1,187) (763) 59,107 20,161 5,364 — — — — — 5,364 — 3,078 — — — — — — — 6,380 385,792 287,589 (9,036) (204,233) 13,645 59,107 20,161 5,364 6,380 December 31, 2016 $ 1,022,863 $ (11,698) $ 3,142,399 $ 41,699 $ 4,195,263 $ 37,820 $ 4,233,083 (thousands of dollars) December 31, 2014 Changes during the year: Net income Issuance of common shares Issue costs, net of tax and other Dividends Interest on convertible debentures paid in common shares Redemption and conversion of convertible debentures Options, deferred share units and restricted share units, net Other comprehensive gain (loss) Contributions from (distributions to) non- controlling interest, net Accumulated Other Comprehensive Loss Retained Earnings Share Capital Contributed Surplus and Other Equity Items Total Shareholders’ Equity Non- Controlling Interest Total Equity $ 833,298 $ (9,070) $ 2,600,605 $ 45,438 $ 3,470,271 $ 27,570 $ 3,497,841 203,865 — — (192,781) — — — — — — — — — — — — — 87,277 (2,749) — 18,857 — — — — — 203,865 87,277 (2,749) (192,781) 18,857 38,614 (891) 37,723 26,379 (898) 25,481 (7,992) — — — — — (7,992) — (137) 203,728 — — — — — — — 929 87,277 (2,749) (192,781) 18,857 37,723 25,481 (7,992) 929 December 31, 2015 $ 844,382 $ (17,062) $ 2,768,983 $ 43,649 $ 3,639,952 $ 28,362 $ 3,668,314 Refer to accompanying notes to the consolidated financial statements. FIRST CAPITAL REALTY ANNUAL REPORT 2016 62 Consolidated Statements of Cash Flows (thousands of dollars) OPERATING ACTIVITIES Net income Adjustments for: (Increase) decrease in value of investment properties, net Interest expense Amortization expense Share of profit of joint ventures Distributions from joint ventures Cash interest paid associated with operating activities Items not affecting cash and other items Net change in non-cash operating items Expenditures on residential development inventory Cash provided by operating activities FINANCING ACTIVITIES Mortgages and credit facilities Borrowings, net of financing costs Principal instalment payments Repayments Repayment of loans on residential development inventory Issuance of senior unsecured debentures, net of issue costs Settlement of hedges Repayment of convertible debentures Repurchase of convertible debentures Issuance of common shares, net of issue costs Payment of dividends Net contributions from (distributions to) non-controlling interest Cash provided by (used in) financing activities INVESTING ACTIVITIES Acquisition of shopping centres Acquisition of development land Net proceeds from property dispositions Distributions from joint ventures Contributions to joint ventures Capital expenditures on investment properties Changes in investing-related prepaid expenses and other liabilities Changes in loans, mortgages and other real estate assets Cash used in investing activities Net increase (decrease) in cash and cash equivalents (bank indebtedness) Cash and cash equivalents (bank indebtedness), beginning of year Year ended December 31 Note 2016 2015 $ 385,792 $ 203,728 4 16 16 27(a) 27(b) 9 9 10 11(c) 4(c) 4(c) 4(d) 27(c) (218,078) 158,687 1,287 (12,437) 573 (141,326) 90,806 (8,706) — 256,598 295,017 (28,685) (267,879) — 300,922 (5,664) (60,294) (4,102) 291,052 (199,789) 6,380 326,958 (286,220) (34,728) 130,215 51,948 (24,952) (218,118) (4,526) (183,836) (570,217) 13,339 (17,036) (37,773) 163,481 2,892 (12,178) 2,505 (141,900) 63,167 563 (52) 244,433 325,274 (30,817) (218,535) (3,572) 93,573 (5,363) — (12,436) 104,727 (190,208) 929 63,572 (96,246) — 22,615 45,098 (56,967) (275,976) 2,570 16,514 (342,392) (34,387) 17,351 Cash and cash equivalents (bank indebtedness), end of year 27(d) $ (3,697) $ (17,036) Refer to accompanying notes to the consolidated financial statements. 63 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Notes to the Consolidated Financial Statements 1. DESCRIPTION OF THE COMPANY First Capital Realty Inc. ("First Capital Realty", "FCR", or the “Company”) is a corporation existing under the laws of Ontario, Canada, and engages in the business of acquiring, developing, redeveloping, owning and managing well-located, high quality urban retail-centered properties. The Company is listed on the Toronto Stock Exchange (“TSX”) under the symbol “FCR”, and its head office is located at 85 Hanna Avenue, Suite 400, Toronto, Ontario, M6K 3S3. 2. SIGNIFICANT ACCOUNTING POLICIES (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (“IASB”). (b) Basis of presentation The audited annual consolidated financial statements are prepared on a going concern basis and have been presented in Canadian dollars rounded to the nearest thousand, unless otherwise indicated. The accounting policies set out below have been applied consistently in all material respects. Changes in standards effective for the current year as well as for future accounting periods are described in Note 3 – “Adoption of New and Amended IFRS Pronouncements”. Comparative information in the financial statements includes reclassification of certain balances to provide consistency with current period classification. The current period classification more appropriately reflects the Company's core operations and any changes are not material to the financial statements as a whole. Additionally, management, in measuring the Company's performance or making operating decisions, distinguishes its operations on a geographical basis. The Company operates in Canada and has three operating segments: Eastern, which includes operations primarily in Quebec and Ottawa; Central, which includes the Company’s Ontario operations excluding Ottawa; and Western, which includes operations in Alberta and British Columbia. Operating segments are reported in a manner consistent with internal reporting provided to the chief operating decision maker, who is the President and Chief Executive Officer. These audited annual consolidated financial statements were approved by the Board of Directors and authorized for issue on February 14, 2017. (c) Basis of consolidation The consolidated financial statements include the financial statements of the Company as well as the entities that are controlled by the Company (subsidiaries). The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are deconsolidated from the date that control ceases. Inter-company transactions, balances and other transactions between consolidated entities are eliminated. (d) Business combinations At the time of acquisition of property, the Company considers whether the acquisition represents the acquisition of a business. The Company accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition to the property. The cost of a business combination is measured as the aggregate of the consideration transferred at acquisition date fair value. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at fair value at the acquisition date. The Company recognizes any contingent consideration to be transferred by the Company at its acquisition date fair value. Goodwill is initially measured at cost, being the excess of the purchase price over the fair value of the net identifiable assets acquired and liabilities assumed. Acquisition-related costs are expensed in the period incurred. FIRST CAPITAL REALTY ANNUAL REPORT 2016 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued When the acquisition of property does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill is recognized. Acquisition-related costs are capitalized to investment property at the time the acquisition is completed. (e) Investments in joint arrangements The Company accounts for its investment in joint ventures using the equity method and accounts for investments in joint operations by recognizing the Company’s direct rights to assets, obligations for liabilities, revenues and expenses. Under the equity method, the interest in the joint venture is carried in the balance sheet at cost plus post-acquisition changes in the Company’s share of the net assets of the joint ventures, less distributions received and less any impairment in the value of individual investments. The Company's income statement reflects its share of the results of operations of the joint ventures after tax. (f) Investment properties Investment properties consist of shopping centres and development land that are held to earn rental income or for capital appreciation, or both. Investment properties also include properties that are being constructed or developed for future use, as well as ground leases to which the Company is the lessee. The Company classifies its investment properties on its consolidated balance sheets as follows: (i) Shopping centres Shopping centres include the Company's shopping centre portfolio, properties currently under development or redevelopment, and any adjacent land parcels available for expansion but not currently under development. (ii) Development land Development land includes land parcels which are not part of one of the Company’s existing shopping centres and which are at various stages of development planning, primarily for future retail occupancy. (iii) Investment properties classified as held for sale Investment property is classified as held for sale when it is expected that the carrying amount will be recovered principally through sale rather than from continuing use. For this to be the case, the property must be available for immediate sale in its present condition, subject only to terms that are usual and customary for sales of such property, and its sale must be highly probable, generally within one year. Upon designation as held for sale, the investment property continues to be measured at fair value and is presented separately on the consolidated balance sheets. Valuation method Investment properties are recorded at fair value, which reflects current market conditions, at each balance sheet date. Gains and losses from changes in fair values are recorded in net income in the period in which they arise. The determination of fair values requires management to make estimates and assumptions that affect the values presented, such that actual values in sales transactions may differ from those presented. The Company has three approaches to determine the fair value of an investment property at the end of each reporting period: 1. External appraisals – by an independent national appraisal firm, in accordance with professional appraisal standards and IFRS. On an annual basis, the Company has a minimum threshold of approximately 25% (as measured by fair value) of the property portfolio requiring external appraisal. Consequently, the entire portfolio is externally appraised at least once within a four-year cycle. 2. Internal appraisals – by certified staff appraisers employed by the Company, in accordance with professional appraisal standards and IFRS. 3. Value updates – primarily consisting of management's review of the key assumptions from previous appraisals and updating the value for changes in the property cash flow, physical condition and changes in market conditions. 65 FIRST CAPITAL REALTY ANNUAL REPORT 2016 The selection of the approach for each property is made based upon the following criteria: • Property type – this includes an evaluation of a property's complexity, stage of development, time since acquisition, and other specific opportunities or risks associated with the property. Stable properties and recently acquired properties will generally receive a value update, while properties under development will typically be valued using internal or external appraisals until completion. • Market risks – specific risks in a region or a trade area may warrant a full internal or external appraisal for certain properties. • Changes in overall economic conditions – significant changes in overall economic conditions may increase the number of external or internal appraisals performed. • Business needs – financings or acquisitions and dispositions may require an external appraisal. Valuation Inputs The Company’s investment property is measured using Level 3 inputs (in accordance with IFRS fair value hierarchy), as not all significant inputs are based on observable market data (unobservable inputs). These unobservable inputs reflect the Company’s own assumptions of how market participants would price investment property, and are developed based on the best information available, including the Company’s own data. These significant unobservable inputs include: • Stabilized cash flows or net operating income, which is based on the location, type and quality of the properties and supported by the terms of any existing lease, other contracts, or external evidence such as current market rents for similar properties, adjusted for estimated vacancy rates based on current and expected future market conditions after expiry of any current lease and expected maintenance costs. • Capitalization rates, discount rates and terminal rates, which are based on location, size and quality of the properties and taking into account market data at the valuation date. Capitalization rates are used for the direct capitalization method and discount and terminal rates are used in the discounted cash flow method described below. • Costs to complete for properties under development. (i) Shopping centres Shopping centres are appraised primarily based on an income approach that reflects stabilized cash flows or net operating income from existing tenants with the property in its existing state, since purchasers typically focus on expected income. External and internal appraisals are conducted using and placing reliance on both the direct capitalization method and the discounted cash flow method (including the estimated proceeds from a potential future disposition). Value updates use the direct capitalization method. (ii) Properties under development Properties undergoing development, redevelopment or expansion are valued either (i) using the stabilized net operating income expected upon completion, with a deduction for costs to complete the project, or (ii) using the discounted cash flow method. Capitalization rates, discount rates and terminal rates, as applicable, are adjusted to reflect lease-up assumptions and construction risk, when appropriate. Adjacent land parcels held for future development are valued based on comparable sales of commercial land. The primary method of appraisal for development land is the comparable sales approach, which considers recent sales activity for similar land parcels in the same or similar markets to estimate a value on either a per acre basis or on a basis of per square foot buildable. Such values are applied to the Company’s properties after adjusting for factors specific to the site, including its location, zoning, servicing and configuration. The cost of development properties includes direct development costs, including internal development costs, realty taxes and borrowing costs attributable to the development. Borrowing costs associated with expenditures on properties under development or redevelopment are capitalized. Borrowing costs are also capitalized on land or properties acquired specifically for development or redevelopment when activities necessary to prepare the asset for development or redevelopment are in progress. The amount of borrowing costs capitalized is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average cost of borrowings to eligible expenditures after adjusting for borrowings associated with other specific developments. Where borrowings are associated with specific developments, the amount capitalized is the gross cost incurred on those borrowings, less any interest income earned on funds not yet employed in construction funding. FIRST CAPITAL REALTY ANNUAL REPORT 2016 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued Capitalization of borrowing costs and all other costs commences when the activities necessary to prepare an asset for development or redevelopment begin, and continue until the date that construction is complete and all necessary occupancy and related permits have been received, whether or not the space is leased. If the Company is required as a condition of a lease to construct tenant improvements that enhance the value of the property, then capitalization of costs continues until such improvements are completed. Capitalization ceases if there are prolonged periods when development activity is interrupted. As required by IFRS in determining investment property fair value, the Company makes no adjustments for portfolio premiums and discounts, nor for any value attributable to the Company's management platform. (g) Residential development inventory Residential development inventory which is developed for sale is recorded at the lower of cost and estimated net realizable value. Residential development inventory is reviewed for impairment at each reporting date. An impairment loss is recognized in net income when the carrying value of the property exceeds its net realizable value. Net realizable value is based on projections of future cash flows which take into account the development plans for each project and management’s best estimate of the most probable set of anticipated economic conditions. The cost of residential development inventory includes borrowing costs directly attributable to projects under active development. The amount of borrowing costs capitalized is determined first by reference to borrowings specific to the project, where relevant, and otherwise by applying a weighted average capitalization rate for the Company’s other borrowings to eligible expenditures. Borrowing costs are not capitalized on residential development inventory where no development activity is taking place. Residential development inventory is presented separately on the consolidated balance sheets as current assets. Residential development inventory is classified as current because the Company intends to sell this asset in the normal operating cycle. (h) Taxation Current income tax assets and liabilities are measured at the amount expected to be received from or paid to tax authorities based on the tax rates and laws enacted or substantively enacted at the consolidated balance sheet dates. Deferred tax liabilities are measured by applying the appropriate tax rate to temporary differences between the carrying amounts of assets and liabilities, and their respective tax basis. The appropriate tax rate is determined by reference to the rates that are expected to apply to the year and the jurisdiction in which the assets are expected to be realized or the liabilities settled. Deferred tax assets are recorded for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, unused tax credits and unused tax losses can be utilized. For the determination of deferred tax assets and liabilities where investment property is measured using the fair value model, the presumption is that the carrying amount of an investment property is recovered through sale, as opposed to presuming that the economic benefits of the investment property will be substantially consumed through use over time. Current and deferred income taxes are recognized in correlation to the underlying transaction either in OCI or directly in equity. (i) Provisions A provision is a liability of uncertain timing or amount. The Company records provisions, including asset retirement obligations, when it has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. Provisions are remeasured at each consolidated balance sheet date using the current discount rate. The increase in the provision due to passage of time is recognized as interest expense. 67 FIRST CAPITAL REALTY ANNUAL REPORT 2016 (j) Share-based payments Equity-settled share-based compensation, including stock options, restricted share units, performance share units and deferred share units, is measured at the fair value of the grants on the grant date. The fair value of options is estimated using an accepted option pricing model, as appropriate to the instrument. The cost of equity-settled share-based compensation is recognized in the consolidated statements of income on a proportionate basis consistent with the vesting features of each grant. (k) Revenue recognition The Company has not transferred substantially all of the risks and benefits of ownership of its investment properties and, therefore, accounts for leases with its tenants as operating leases. Revenue recognition under a lease commences when the tenant has a right to use the leased asset, which is typically when the space is turned over to the tenant to begin fixturing. Where the Company is required to make additions to the property in the form of tenant improvements that enhance the value of the property, revenue recognition begins upon substantial completion of those improvements. The total amount of contractual rent to be received from operating leases is recognized on a straight-line basis over the term of the lease, including any fixturing period. A receivable, which is included in the carrying amount of an investment property, is recorded for the difference between the straight-line rental revenue recorded and the contractual amount received. Rental revenue also includes percentage rents based on tenant sales, and recoveries of operating expenses and property taxes. Percentage rents are recognized when the sales thresholds set out in the leases have been met. Operating expense recoveries are recognized in the period that recoverable costs are chargeable to tenants. (l) Financial instruments and derivatives All financial instruments are required to be measured at fair value on initial recognition. Measurement in subsequent periods depends on whether the financial instrument has been classified as fair value through profit or loss (“FVTPL”), available-for-sale (“AFS”), held-to-maturity, loans and receivables or other liabilities. Derivative instruments are recorded in the consolidated balance sheets at fair value, including those derivatives that are embedded in financial or non-financial contracts and which are not closely related to the host contract. The Company enters into forward contracts, interest rate swaps, and cross currency swaps to hedge its risks associated with movements in interest rates and the movement in the Canadian to US dollar exchange rate. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Hedge accounting is discontinued prospectively when the hedging relationship is terminated, when the instrument no longer qualifies as a hedge, or when the hedged item is sold or terminated. In cash flow hedging relationships, the portion of the change in the fair value of the hedging derivative that is considered to be effective is recognized in other comprehensive income (“OCI”) while the portion considered to be ineffective is recognized in net income. Unrealized hedging gains and losses in accumulated other comprehensive income (“AOCI”) are reclassified to net income in the periods when the hedged item affects net income. Gains and losses on derivatives are immediately reclassified to net income when the hedged item is sold or terminated or when it is determined that a hedged forecasted transaction is no longer probable. Changes in the fair value of derivative instruments, including embedded derivatives, that are not designated as hedges for accounting purposes, are recognized in other gains (losses) and (expenses). FIRST CAPITAL REALTY ANNUAL REPORT 2016 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued The following summarizes the Company’s classification and measurement of financial assets and liabilities: Financial assets Investments designated as AFS Derivative assets Loans and mortgages receivable Equity securities designated as FVTPL Amounts receivable Cash and cash equivalents Restricted cash Financial liabilities Bank indebtedness Mortgages Credit facilities Senior unsecured debentures Convertible debentures Accounts payable and other liabilities Derivative liabilities Classification Measurement AFS FVTPL Loans and receivables FVTPL Loans and receivables Loans and receivables Loans and receivables Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities Other liabilities FVTPL Fair value Fair value Amortized cost Fair value Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Amortized cost Fair value In determining fair values, the Company evaluates counterparty credit risks and makes adjustments to fair values and credit spreads based upon changes in these risks. Fair value measurements recognized in the consolidated balance sheets are categorized using a fair value hierarchy that reflects the significance of inputs used in determining the fair values: (i) Level 1 Inputs – quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The Company’s investments in equity securities are measured using Level 1 inputs; (ii) Level 2 Inputs – inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). The Company’s derivative assets and liabilities are measured using Level 2 inputs; and (iii) Level 3 Inputs – inputs for the asset or liability that are not based on observable market data (unobservable inputs). These unobservable inputs reflect the Company's own assumptions about the data that market participants would use in pricing the asset or liability, and are developed based on the best information available, including the Company’s own data. For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. (m) Cash and cash equivalents Cash and cash equivalents include cash, bank indebtedness, and short-term investments with original maturities at the time of acquisition of three months or less. (n) Critical judgments in applying accounting policies The following are the critical judgments that have been made in applying the Company’s accounting policies and that have the most significant effect on the amounts in the consolidated financial statements: (i) Investment properties In applying the Company’s policy with respect to investment properties, judgment is applied in determining whether certain costs are additions to the carrying amount of the property and, for properties under development, identifying the point at which capitalization of borrowing and other costs ceases. Judgment is also applied in determining the extent and frequency of external and internal appraisals in order to estimate fair values. 69 FIRST CAPITAL REALTY ANNUAL REPORT 2016 (ii) Hedge accounting Where the Company undertakes to apply cash flow hedge accounting, it must determine whether such hedges are expected to be highly effective in achieving offsetting changes in cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the reporting periods for which they were designated. (iii) Income taxes The Company exercises judgment in estimating deferred tax assets and liabilities. Income tax laws may be subject to different interpretations, and the income tax expense recorded by the Company reflects the Company’s interpretation of the relevant tax laws. The Company is also required to estimate the timing of reversals of temporary differences between accounting and taxable income in determining the appropriate rate to apply in calculating deferred taxes. (o) Critical accounting estimates and assumptions The Company makes estimates and assumptions that affect the carrying amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amount of earnings for the reporting periods. Actual results could differ from those estimates. The estimates and assumptions that the Company considers critical include those underlying the valuation of investment properties, as set out above, which describes the process by which investment properties are valued, and the determination of which properties are externally and internally appraised and how often. Additional critical accounting estimates and assumptions include those used for determining the values of financial instruments for disclosure purposes (Note 22), estimating deferred taxes, allocation of convertible debentures liability and equity components, assessing the allowance for doubtful accounts on trade receivables, and estimating the fair value of share-based compensation (Note 13). 3. ADOPTION OF NEW AND AMENDED IFRS PRONOUNCEMENTS (a) IFRS Amendments The Company has adopted the amended International Financial Reporting Standards ("IFRS") pronouncement listed below as of January 1, 2016, in accordance with its transitional provisions. Joint Arrangements The amendments to IFRS 11, "Joint Arrangement" ("IFRS 11") are effective for annual periods beginning on or after January 1, 2016. The amendments address how a joint operator should account for the acquisition of an interest in a joint operation in which the activity of the joint operation constitutes a business. IFRS 11, as amended, now requires that such transactions shall be accounted for using the principles related to business combinations accounting as outlined in IFRS 3, "Business Combinations". The Company adopted the amendments effective January 1, 2016 which have not had a material effect on its consolidated financial statements. (b) Recent Accounting Pronouncements Not Yet Adopted The IASB has issued new standards and amendments to existing standards. These changes are not yet adopted by the Company and could have an impact on future periods. These changes are described in detail below: Financial instruments IFRS 9, “Financial Instruments” (“IFRS 9”), was issued in July 2014, and replaces IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 addresses the classification and measurement of all financial assets and financial liabilities within the scope of the current IAS 39 and introduced a new expected credit loss impairment model that will require more timely recognition of expected credit losses and a substantially reformed model for hedge accounting. Also included are the requirements to measure debt-based financial assets at either amortized cost or fair value through profit or loss (“FVTPL”) and to measure equity-based financial assets as either held-for-trading or fair value through other comprehensive income (“FVTOCI”). No amounts are reclassified out of other comprehensive income (“OCI”) if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no longer be bifurcated and accounted for separately under IFRS 9. FIRST CAPITAL REALTY ANNUAL REPORT 2016 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued The revised hedge accounting model permits additional hedging strategies used for risk management to qualify for hedge accounting. IFRS 9 is required for annual periods beginning on or after January 1, 2018. The Company is in the process of assessing the impact of IFRS 9 on its consolidated financial statements. Revenue from contracts with customers IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”), was issued in May 2014, and replaces IAS 11, “Construction Contracts”, IAS 18, “Revenue Recognition”, IFRIC 13, “Customer Loyalty Programmes”, IFRIC 15, “Agreements for the Construction of Real Estate”, IFRIC 18, “Transfers of Assets from Customers”, and SIC-31, “Revenue – Barter Transactions Involving Advertising Services”. IFRS 15 provides a single, principles-based five-step model that will apply to all contracts with customers with limited exceptions, including, but not limited to, leases within the scope of IAS 17 “Leases”; financial instruments and other contractual rights or obligations within the scope of IFRS 9, IFRS 10, “Consolidated Financial Statements”, and IFRS 11, “Joint Arrangements”. In addition to the five-step model, the standard specifies how to account for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The incremental costs of obtaining a contract must be recognized as an asset if the Company expects to recover these costs. The standard’s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the Company’s ordinary activities. IFRS 15 is required for annual periods beginning on or after January 1, 2018. Earlier adoption is permitted. The Company is in the process of assessing the impact of IFRS 15 on its consolidated financial statements. Leases IFRS 16, “Leases” (“IFRS 16”), was issued in January 2016, and replaces IAS 17, “Leases” (“IAS 17”). IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. Certain leases will be exempt from these requirements. The most significant effect expected of the new requirements will be an increase in lease assets and financial liabilities for lessees with material off-balance sheet leases. Lessor accounting requirements under IFRS 16 are carried forward from IAS 17 and accordingly, leases will continue to be classified and accounted for as operating or finance leases by lessors. IFRS 16 is required for annual periods beginning on or after January 1, 2019. Earlier adoption is permitted. The Company does not expect any significant impact on its consolidated financial statements. Investment property The amendments to IAS 40, "Investment Property", clarify the accounting guidance and evidence required when an entity transfers to, or from, investment property. The amendments are effective for annual periods beginning on or after January 1, 2018. The Company does not expect any significant impact on its consolidated financial statements. 71 FIRST CAPITAL REALTY ANNUAL REPORT 2016 4. INVESTMENT PROPERTIES (a) Activity The following tables summarize the changes in the Company’s investment properties for the years ended December 31, 2016 and 2015: Central Region Eastern Region Western Region Total Shopping Centres Development Land Year ended December 31, 2016 Balance at beginning of year $ 3,337,859 $ 1,820,967 $ 2,748,246 $ 7,907,072 $ 7,870,719 $ Acquisitions Capital expenditures Reclassification to residential development inventory Increase (decrease) in value of investment properties, net Straight-line rent and other changes Dispositions Revaluation of deferred purchase price of shopping centre Balance at end of year Investment properties 168,885 124,233 (5,010) 63,066 21,659 — 88,997 72,226 — 320,948 218,118 (5,010) 286,220 215,504 (5,010) 110,167 21,096 86,815 218,078 217,574 2,239 1,148 2,461 5,848 5,848 (27,135) (102,403) — — (10,061) (4,958) (139,599) (4,958) (132,549) (4,958) $ 3,711,238 $ 1,825,533 $ 2,983,726 $ 8,520,497 Investment properties classified as held for sale Total 8,453,348 $ 8,370,298 $ 83,050 $ $ $ 8,453,348 $ 67,149 36,353 34,728 2,614 — 504 — (7,050) — 67,149 67,149 — Balance at beginning of year Acquisitions Capital expenditures Reclassifications between shopping centres and development land Reclassification from residential development inventory Increase (decrease) in value of investment properties, net Straight-line rent and other changes Dispositions Balance at end of year Investment properties Investment properties classified as held for sale Total Central Region Eastern Region Western Region $ 3,207,544 $ 29,030 115,596 — 1,744,533 $ 18,539 69,091 — 2,557,714 $ 50,130 91,289 — Total 7,509,791 97,699 275,976 — Year ended December 31, 2015 Shopping Centres Development Land $ 7,474,329 $ 97,699 275,133 1,546 35,462 — 843 (1,546) 4,016 — — 4,016 — 4,016 (20,100) 12,705 45,168 37,773 40,195 (2,422) 3,383 (2,374) 3,945 4,954 4,954 — (1,610) 3,337,859 $ (21,527) 1,820,967 $ $ — 2,748,246 $ (23,137) 7,907,072 (23,137) 7,870,719 $ 7,779,482 $ 91,237 7,870,719 $ $ $ $ — 36,353 29,853 6,500 36,353 Investment properties with a fair value of $2.4 billion (December 31, 2015 – $2.4 billion) are pledged as security for $1.2 billion in mortgages and credit facilities. FIRST CAPITAL REALTY ANNUAL REPORT 2016 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (b) Investment property valuation Capitalization rates by region for investment properties – shopping centres are set out in the table below: As at ($ millions) Central Region Eastern Region Western Region Total or Weighted Average Fair Value 3,663 1,819 2,971 8,453 $ $ December 31, 2016 Weighted Average Capitalization Rate 5.3% $ 6.0% 5.3% 5.5% $ December 31, 2015 Weighted Average Capitalization Rate 5.5% 6.1% 5.5% 5.7% Fair Value 3,328 1,814 2,729 7,871 The sensitivity of the fair values of shopping centres to capitalization rates as at December 31, 2016 is set out in the table below: As at December 31, 2016 (Decrease) Increase in capitalization rate (0.75%) (0.50%) (0.25%) 0.25% 0.50% 0.75% (millions of dollars) Resulting increase (decrease) in value of shopping centres $ $ $ $ $ $ 1,251 794 380 (338) (652) (941) Additionally, a 1% increase or decrease in stabilized net operating income ("SNOI") would result in a $83 million increase or a $74 million decrease, respectively, in the fair value of shopping centres. SNOI is not a measure defined by IFRS. SNOI reflects long-term, stable property operations, assuming a certain level of vacancy, capital and operating expenditures required to maintain a stable occupancy rate. The average vacancy rates used in determining SNOI for non-anchor tenants generally range from 2% to 5%. A 1% increase in SNOI coupled with a 0.25% decrease in capitalization rate would result in an increase in the fair value of shopping centres of $462 million, and a 1% decrease in SNOI coupled with a 0.25% increase in capitalization rate would result in a decrease in the fair value of shopping centres of $413 million. (c) Investment properties – Acquisitions During the year ended December 31, 2016 and 2015, the Company acquired shopping centres and development land for rental income and future development and redevelopment opportunities as follows: Year ended December 31 Total purchase price, including acquisition costs Mortgage assumption on acquisition Total cash paid Shopping Centres 286,220 — 286,220 $ $ 2016 Development Land $ $ 34,728 — 34,728 2015 Shopping Centres Development Land $ $ 97,699 (1,453) 96,246 $ $ — — — 73 FIRST CAPITAL REALTY ANNUAL REPORT 2016 (d) Investment properties classified as held for sale The Company has certain investment properties classified as held for sale. These properties are considered to be non-core assets and are as follows: As at Aggregate fair value Mortgages secured by investment properties classified as held for sale Weighted average effective interest rate of mortgages secured by investment properties $ $ classified as held for sale December 31, 2016 December 31, 2015 83,050 9,990 $ $ 4.1% 97,737 — —% The decrease of $14.7 million in investment properties classified as held for sale from December 31, 2015, arose primarily from dispositions completed this year as well as a change in the mix of properties classified as held for sale. For the year ended December 31, 2016 and 2015, the Company sold shopping centres and development land as follows: Total selling price Vendor take-back mortgage on sale Property selling costs Total cash proceeds Year ended December 31 2015 2016 23,137 139,600 $ — (6,950) (522) (2,435) 22,615 130,215 $ $ $ (e) Reconciliation of investment properties to total assets Shopping centres and development land by region and a reconciliation to total assets are set out in the tables below: As at December 31, 2016 Total shopping centres and development land (1) Cash and cash equivalents Loans, mortgages and other real estate assets Other assets Amounts receivable Investment in joint ventures Residential development inventory Total assets As at December 31, 2015 Total shopping centres and development land (1) Cash and cash equivalents Loans, mortgages and other real estate assets Other assets Amounts receivable Investment in joint ventures Total assets (1) Includes investment properties classified as held for sale. Central Region Eastern Region Western Region Total $ 3,711,238 $ 1,825,533 $ 2,983,726 $ 8,520,497 12,217 353,295 45,937 21,175 146,422 5,010 9,104,553 $ Central Region Eastern Region Western Region Total $ 3,337,859 $ 1,820,967 $ 2,748,246 $ 7,907,072 9,164 159,918 24,548 17,705 160,119 $ 8,278,526 FIRST CAPITAL REALTY ANNUAL REPORT 2016 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 5. LOANS, MORTGAGES AND OTHER REAL ESTATE ASSETS As at Non-current Loans and mortgages receivable (a) Available-for-sale (“AFS”) investment in limited partnership Deposit on investment property (b) Total non-current Current Loans and mortgages receivable (a) Fair value through profit or loss ("FVTPL") investments in securities (c) Other receivable Total current Total December 31, 2016 December 31, 2015 $ 131,955 3,824 189,200 324,979 15,281 12,969 66 28,316 353,295 $ $ $ $ $ $ $ $ $ 120,173 4,269 — 124,442 23,499 11,907 70 35,476 159,918 (a) Loans and mortgages receivable are secured by interests in investment properties or shares of entities owning investment properties. As at December 31, 2016, these receivables bear interest at weighted average effective interest rates of 6.9% (December 31, 2015 – 6.3% ) and mature between 2016 and 2023. (b) In the third quarter of 2016, the Company advanced $189.2 million as a deposit on the acquisition of an investment property, located at One Bloor Street in Toronto, that is currently under construction. The deposit earns interest of 4.5% until the purchase closing date which is estimated to be the fourth quarter of 2017. (c) The Company has invested in publicly traded real estate and related securities. These securities are recorded at market value. Realized and unrealized gains and losses on FVTPL securities are recorded in other gains (losses) and (expenses). Scheduled principal receipts of loans and mortgages receivable as at December 31, 2016 are as follows: Scheduled Receipts Weighted Average Effective Interest Rate $ $ $ $ $ 13,646 4,816 73,663 — 4,950 47,303 144,378 2,858 147,236 15,281 131,955 147,236 12.3% 8.4% 6.8% —% 5.2% 5.5% 6.9% 12.3% 6.3% 6.9% 2017 2018 2019 2020 2021 2022 to 2023 Unamortized deferred financing fees and accrued interest Current Non-current Total 75 FIRST CAPITAL REALTY ANNUAL REPORT 2016 6. AMOUNTS RECEIVABLE As at Trade receivables (net of allowances for doubtful accounts of $3.6 million; December 31, 2015 – $2.8 million) Corporate and other amounts receivable Total December 31, 2016 December 31, 2015 $ $ 19,291 1,884 21,175 $ $ 16,844 861 17,705 The Company determines its allowance for doubtful accounts on a tenant-by-tenant basis considering lease terms, industry conditions, and the status of the tenant’s account, among other factors. 7. OTHER ASSETS As at Non-current Fixtures, equipment and computer hardware and software (net of accumulated amortization of $5.1 million; December 31, 2015 - $3.9 million) Deferred financing costs on credit facilities (net of accumulated amortization of $3.5 million; December 31, 2015 - $3.1 million) Environmental indemnity and insurance proceeds receivable Held-to-maturity investment in bond Derivatives at fair value Total non-current Current Deposits and costs on investment properties under option Prepaid expenses Other deposits Restricted cash Derivatives at fair value Total current Total Note December 31, 2016 December 31, 2015 $ 9,986 $ 3,153 12(a) 22 22 2,453 6,875 — 2,683 21,997 2,668 6,719 1,074 3,724 9,755 23,940 45,937 $ $ $ $ 2,172 8,274 685 — 14,284 3,824 4,457 1,924 59 — 10,264 24,548 $ $ $ $ 8. CAPITAL MANAGEMENT The Company manages its capital, taking into account the long-term business objectives of the Company, to provide stability and reduce risk while generating an acceptable return on investment to shareholders over the long term. The Company’s capital structure currently includes common shares, senior unsecured debentures, mortgages, convertible debentures, credit facilities and bank indebtedness, which together provide the Company with financing flexibility to meet its capital needs. Primary uses of capital include development activities, acquisitions, capital improvements, leasing costs and debt principal repayments. The actual level and type of future financings to fund these capital requirements will be determined based on prevailing interest rates, various costs of debt and/or equity capital, capital market conditions and management’s general view of the required leverage in the business. FIRST CAPITAL REALTY ANNUAL REPORT 2016 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued The components of the Company’s capital are set out in the table below: As at December 31, 2016 December 31, 2015 Liabilities (principal amounts outstanding) Bank indebtedness Mortgages Credit facilities Mortgages under equity accounted joint ventures (at the Company’s interest) Credit facilities under equity accounted joint venture (at the Company's interest) Senior unsecured debentures Convertible debentures Equity Capitalization Common shares (based on closing per share price of $20.67; December 31, 2015 – $18.35) Total Capital Employed $ 15,914 995,925 251,481 46,741 80,131 2,550,000 212,635 $ 26,200 1,020,358 224,635 3,878 43,669 2,250,000 337,271 5,033,286 4,138,622 $ 9,186,113 $ 8,044,633 The Company is subject to financial covenants in agreements governing its senior unsecured debentures and its credit facilities. In accordance with the terms of the Company's credit agreements, all ratios are calculated with joint ventures proportionately consolidated. As at December 31, 2016, the Company remains in compliance with all of its applicable financial covenants. The following table summarizes a number of the Company's key ratios: As at Net debt to total assets Unencumbered aggregate assets to unsecured debt, using 10 quarter average capitalization rate (1) Shareholders’ equity, using four quarter average (billions) (1) Secured indebtedness to total assets (1) For the rolling four quarters ended Interest coverage (EBITDA to interest expense) (1) Fixed charge coverage (EBITDA to debt service) (1) Measure/ Covenant December 31, 2016 December 31, 2015 $ 42.6% 2.0 4.0 12.7% 2.5 2.2 42.9% 2.2 3.6 13.1% 2.5 2.1 $ >$1.6B <35% >1.65 >1.50 (1) Calculations required under the Company's credit facility agreements or indenture governing the senior unsecured debentures. The above ratios include measures not specifically defined in IFRS. Certain calculations are required pursuant to debt covenants and are meaningful measures for this reason. Measures used in these ratios are defined below: • Debt consists of principal amounts outstanding on credit facilities and mortgages, and the par value of senior unsecured debentures. Convertible debentures are excluded for the net debt to total assets ratio, as the Company has the option to satisfy its obligations of principal and interest payments in respect of all of its outstanding convertible debentures by the issuance of common shares; • Net debt is calculated as Debt, as defined above, reduced by cash balances at the end of the period; • Secured indebtedness includes mortgages and any draws under the secured facilities that are collateralized against investment property. • EBITDA, as adjusted, is calculated as net income, adding back income tax expense, interest expense and amortization and excluding the increase or decrease in the value of investment properties, other gains (losses) and (expenses) and other non-cash or non-recurring items. The Company also adjusts for incremental leasing costs and costs not capitalized during the development period. • Fixed charges include regular principal and interest payments and capitalized interest in the calculation of interest expense and do not include non-cash interest on convertible debentures. 77 FIRST CAPITAL REALTY ANNUAL REPORT 2016 • Unencumbered assets include the value of assets that have not been pledged as security under any credit agreement or mortgage. The unencumbered asset value ratio is calculated as unencumbered assets divided by the principal amount of the unsecured debt, which consists of the bank indebtedness, unsecured credit facilities, senior unsecured debentures and convertible debentures. 9. MORTGAGES AND CREDIT FACILITIES As at Fixed rate mortgages Unsecured facilities Secured facilities Mortgages and credit facilities Current Mortgages on investment properties classified as held for sale Non-current Total December 31, 2016 December 31, 2015 $ 997,165 183,451 68,030 $ 1,248,646 116,952 $ 9,990 1,121,704 $ 1,248,646 $ 1,024,002 195,000 29,635 $ 1,248,637 191,896 $ — 1,056,741 $ 1,248,637 Mortgages and secured facilities are secured by the Company's investment properties. As at December 31, 2016, approximately $2.4 billion (December 31, 2015 – $2.4 billion) of investment properties out of $8.5 billion (December 31, 2015 – $7.9 billion) had been pledged as security under the mortgages and the secured facilities (Note 4 (a)). As at December 31, 2016, mortgages bear coupon interest at a weighted average coupon rate of 4.5% (December 31, 2015 – 4.8%) and mature in the years ranging from 2017 to 2026. The weighted average effective interest rate on all mortgages as at December 31, 2016 is 4.4% (December 31, 2015 – 4.5%). Principal repayments of mortgages outstanding as at December 31, 2016 are as follows: 2017 2018 2019 2020 2021 2022 to 2026 Unamortized deferred financing costs and premiums, net Total Scheduled Amortization Payments on Maturity $ $ 27,335 $ 23,442 20,730 19,087 17,320 41,643 149,557 $ 82,902 $ 124,321 106,714 45,858 73,397 413,176 846,368 $ $ Weighted Average Effective Interest Rate 4.1% 5.4% 6.5% 5.3% 4.4% 3.6% 4.4% Total 110,237 147,763 127,444 64,945 90,717 454,819 995,925 1,240 997,165 The Company has the ability under its unsecured credit facilities to draw funds based on Canadian bank prime rates, and Canadian bankers’ acceptances (“BA rates”) for Canadian dollar-denominated borrowings, and LIBOR rates or U.S. prime rates for U.S. dollar-denominated borrowings. As of December 31, 2016, the Company had drawn CAD$30.0 million and US $114.3 million, as well as CAD$15.9 million in bank indebtedness on its unsecured credit facilities. Concurrently with the U.S. dollar draws, the Company entered into cross currency swaps to exchange its U.S. dollar borrowings into Canadian dollar borrowings. Effective June 30, 2016, the Company extended the maturity of its $800 million unsecured facility to June 30, 2021 on substantially the same terms. In September 2016, the Company entered into two secured facilities totaling $19.4 million, at the Company's proportionate interest, maturing between 2018 and 2019. FIRST CAPITAL REALTY ANNUAL REPORT 2016 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued In the fourth quarter, the Company entered into a new unsecured facility with a borrowing capacity of CAD$150 million, key terms of which are presented in the table below. The Company’s credit facilities as at December 31, 2016 are summarized in the table below: As at December 31, 2016 Unsecured Operating Facilities Borrowing Capacity Amounts Drawn Bank Indebtedness and Outstanding Letters of Credit Available to be Drawn Interest Rates Maturity Date Revolving facility maturing 2021 Non-revolving facility maturing 2020 (1) $ 800,000 $ (30,000) $ (46,615) $ 723,385 BA + 1.20% or Prime + 0.20% or US$ LIBOR + 1.20% 150,000 (153,451) — — BA + 1.20% or Prime + 0.20% or US$ LIBOR + 1.20% June 30, 2021 October 30, 2020 Secured Construction Facilities Maturing 2018 115,000 (40,870) (1,475) 72,655 Maturing 2017 7,953 (7,785) Secured Facilities Maturing 2019 11,875 (11,875) Maturing 2018 7,500 (7,500) — — — 168 — — BA + 1.125% or Prime + 0.125% BA + 1.125% or Prime + 0.125% BA + 1.125% or Prime + 0.125% BA + 1.125% or Prime + 0.125% February 13, 2018 March 31, 2017 September 27, 2019 September 6, 2018 Total $ 1,092,328 $ (251,481) $ (48,090) $ 796,208 (1) The Company had drawn in US dollars the equivalent of CAD$150.0 million which was revalued at CAD$153.5 million as at December 31, 2016, as such the Company is in compliance with its borrowing capacity. 10. SENIOR UNSECURED DEBENTURES As at December 31, 2016 December 31, 2015 Series Maturity Date Coupon Effective Interest Rate 5.85% 5.70% 5.25% 4.95% 5.48% 5.60% 4.50% 4.43% 3.95% 3.90% 4.79% 4.32% 3.60% 4.57% 5.99% 5.79% 5.66% 5.17% 5.61% 5.60% 4.63% 4.59% 4.18% 3.97% 4.72% 4.24% 3.56% 4.63% H I J K L January 31, 2017 November 30, 2017 August 30, 2018 November 30, 2018 July 30, 2019 M April 30, 2020 N March 1, 2021 O P Q R S January 31, 2022 December 5, 2022 October 30, 2023 August 30, 2024 July 31, 2025 T May 6, 2026 Weighted Average or Total Current Non-current Total 79 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Principal Outstanding Liability $ 125,000 $ 124,985 $ 125,000 50,000 100,000 150,000 175,000 175,000 200,000 250,000 300,000 300,000 300,000 300,000 124,906 49,761 99,602 149,542 174,988 174,177 198,567 247,066 298,794 301,323 301,768 300,963 Liability 124,814 124,809 49,678 99,411 149,382 174,985 174,002 198,323 246,637 298,643 301,466 301,941 — $ $ 2,550,000 $ 2,546,442 $ 2,244,091 250,000 2,300,000 249,891 2,296,551 2,550,000 $ 2,546,442 $ — 2,244,091 2,244,091 Interest on the senior unsecured debentures is payable semi-annually and principal is payable on maturity. On May 6, 2016 the Company completed the issuance of $150.0 million principal amount of Series T senior unsecured debentures due May 6, 2026. These debentures bear interest at a coupon rate of 3.6% per annum and an effective interest rate of 3.7%, payable semi-annually commencing November 6, 2016. On September 29, 2016, the Company completed the issuance of an additional $150.0 million principal amount of Series T senior unsecured debentures, which was a re-opening of this series of debentures, with an effective interest rate of 3.4%. 11. CONVERTIBLE DEBENTURES As at December 31, 2016 December 31, 2015 Series Maturity Date Coupon Effective Principal Liability Equity Principal Liability Equity Interest Rate H G E F I J March 31, 2017 March 31, 2018 January 31, 2019 January 31, 2019 July 31, 2019 February 28, 2020 Weighted Average or Total Current Non-current Total 4.95% 5.25% 5.40% 5.25% 4.75% 4.45% 4.96% 6.51% 6.66% 6.90% 6.07% 6.19% 5.34% 6.12% — — 54,666 51,584 51,210 55,175 — — 53,095 50,773 49,822 53,943 — — 2,084 351 1,403 386 71,006 49,582 55,060 53,720 51,604 56,299 69,697 48,144 52,793 52,506 49,579 54,624 1,415 1,146 2,099 365 1,414 394 $ 212,635 $ 207,633 $ 4,224 $ 337,271 $ 327,343 $ 6,833 106,250 103,868 106,385 103,765 — — 337,271 327,343 $ 212,635 $ 207,633 $ 4,224 $ 337,271 $ 327,343 $ 6,833 (a) Principal and interest The Company has the option of repaying the convertible debentures on maturity through the issuance of common shares at 97% of the 20-day volume weighted average trading price of the Company’s common shares ending five days prior to maturity date. The Company also has the option of paying the semi-annual interest through the issuance of common shares. In addition, the Company has the option of repaying the convertible debentures prior to the maturity date under certain circumstances, either in cash or in common shares. During the year ended December 31, 2016, 0.7 million common shares (year ended December 31, 2015 – 1.0 million common shares) were issued for $13.6 million (year ended December 31, 2015 – $18.9 million) to pay interest to holders of the convertible debentures. Each series of the Company’s convertible debentures bears interest payable semi-annually and is convertible at the option of the holders in the conversion periods into common shares of the Company at the conversion prices indicated below. Maturity Date January 31, 2019 January 31, 2019 July 31, 2019 February 28, 2020 Coupon Rate 5.40% 5.25% 4.75% 4.45% TSX FCR.DB.E FCR.DB.F FCR.DB.I FCR.DB.J Holder Option to Convert at the Conversion Price Company Option to Redeem at Principal Amount (conditional (1)) Company Option to Redeem at Principal Amount (2) Conversion Price 2011-2019 Jan 31, 2015 - Jan 30, 2017 Jan 31, 2017 - Jan 31, 2019 2011-2019 Jan 31, 2015 - Jan 30, 2017 Jan 31, 2017 - Jan 31, 2019 $22.62 $23.77 2012-2019 Jul 31, 2015 - Jul 30, 2017 Jul 31, 2017 - Jul 31, 2019 $26.75; $27.75 2013-2020 Feb 28, 2016 - Feb 27, 2018 Feb 28, 2018 - Feb 28, 2020 $26.75; $27.75 (3) (4) (1) Period of time during which the Company may redeem the debentures at their principal amount plus accrued and unpaid interest, provided that the volume weighted average trading price for the 20 consecutive trading days ending five days prior to the notice of redemption is not less than 125% of the Conversion Price, by giving between 30 and 60 days' written notice. (2) Period of time during which the Company may redeem the debentures at their principal amount plus accrued and unpaid interest by giving between 30 and 60 days' written notice. (3) These debentures are convertible at the option of the holder into common shares of the Company at a conversion price of $26.75 per common share until July 31, 2017 and $27.75 per common share thereafter. (4) These debentures are convertible at the option of the holder into common shares of the Company at a conversion price of $26.75 per common share until February 28, 2018 and $27.75 per common share thereafter. FIRST CAPITAL REALTY ANNUAL REPORT 2016 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (b) Principal redemption On April 1, 2016, the Company redeemed its remaining 5.25% Series G and 4.95% Series H convertible debentures at par. The full redemption price and any accrued interest owing on each series of convertible debentures was satisfied 50% by the issuance of common shares and 50% in cash. On December 22, 2016, the Company provided a notice of redemption to the holders of the remaining 5.40% Series E and 5.25% Series F convertible debentures that the entire principal amount outstanding plus accrued interest would be redeemed in cash on January 31, 2017. (c) Normal course issuer bid Effective August 29, 2016, the Company renewed its normal course issuer bid (“NCIB”) for all of its then outstanding series of convertible debentures. The NCIB will expire on August 28, 2017 or such earlier date as the Company completes its purchases pursuant to the NCIB. All purchases made under the NCIB are at market prices prevailing at the time of purchase determined by or on behalf of the Company. For the year ended December 31, 2016 and 2015, principal amounts of convertible debentures purchased and amounts paid for the purchases are represented in the table below: Year ended December 31 2016 2015 Total $ 4,048 $ 4,102 $ 12,289 $ 12,436 Principal Amount Purchased Amount Paid Principal Amount Purchased Amount Paid 12. ACCOUNTS PAYABLE AND OTHER LIABILITIES As at Note December 31, 2016 December 31, 2015 Non-current Asset retirement obligations (a) Ground leases payable Derivatives at fair value Deferred purchase price of investment property – shopping centre Deferred income Total non-current Current Trade payables and accruals Construction and development payables Dividends payable Interest payable Tenant deposits Derivatives at fair value Deferred purchase price of investment property – shopping centre Total current Total 22 22 $ $ $ $ $ 7,815 9,423 6,469 1,763 1,606 27,076 66,343 49,204 52,330 38,016 26,573 — — 232,466 259,542 $ $ $ $ $ 8,353 9,789 8,171 1,699 1,673 29,685 59,222 49,593 48,491 38,537 23,391 788 9,533 229,555 259,240 (a) The Company has obligations for environmental remediation at certain sites within its property portfolio. The Company has also recognized a related environmental indemnity and insurance proceeds receivable in other assets (Note 7). 81 FIRST CAPITAL REALTY ANNUAL REPORT 2016 13. SHAREHOLDERS’ EQUITY (a) Share capital The authorized share capital of the Company consists of an unlimited number of authorized preference shares and common shares. The preference shares may be issued from time to time in one or more series, each series comprising the number of shares, designations, rights, privileges, restrictions and conditions which the Board of Directors determines by resolution; preference shares are non-voting and rank in priority to the common shares with respect to dividends and distributions upon dissolution. No preference shares have been issued. The common shares carry one vote each and participate equally in the income and the net assets of the Company upon dissolution. Dividends are payable on the common shares as and when declared by the Board of Directors. The following table sets forth the particulars of the issued and outstanding common shares of the Company: Year ended December 31 2016 Note Number of Common Shares Stated Capital Number of Common Shares Issued and outstanding at beginning of year Payment of interest on convertible debentures Redemption and conversion of convertible debentures Exercise of options and restricted and deferred share units 11 11 Issuance of common shares Share issue costs and other, net of tax effect 225,538 $ 673 3,080 1,129 13,087 — 2,768,983 13,645 60,294 20,924 287,589 (9,036) 2015 Stated Capital 2,600,605 18,857 38,614 26,379 216,374 $ 1,024 2,152 1,577 4,411 — 87,277 (2,749) Issued and outstanding at end of year 243,507 $ 3,142,399 225,538 $ 2,768,983 On May 26, 2016, the Company issued 5.5 million common shares at a price of $21.10 for gross proceeds of $115.0 million. Additionally, on August 17, 2016, the Company issued 7.6 million common shares at a price of $22.60 for gross proceeds of $172.6 million. Dividends declared per common share were $0.86 for the year ended December 31, 2016 (year ended December 31, 2015 – $0.86). (b) Contributed surplus and other equity items Contributed surplus and other equity items comprise the following: Year ended December 31 2016 Contributed Surplus Convertible Debentures Equity Component Stock-based Compensation Plan Awards Total Contributed Surplus Convertible Debentures Equity Component Stock-based Compensation Plan Awards 2015 Total Balance at beginning of year Redemption of convertible debentures in common shares Repurchase of convertible debentures Options vested Exercise of options Deferred share units Restricted share units Performance share units Exercise of restricted and deferred share units $ 19,532 $ 1,386 6,833 $ (2,561) 36 — — — — — — (48) — — — — — — — — 17,284 $ 43,649 $ (1,175) 19,292 $ — 7,964 $ (885) 18,182 $ 45,438 (885) — (12) 240 (246) — (6) 833 (1,540) 820 2,102 547 833 (1,540) 820 2,102 547 (3,525) (3,525) — — — — — — — — — — — — 652 (1,280) 984 2,617 — 652 (1,280) 984 2,617 — (3,871) (3,871) Balance at end of year $ 20,954 $ 4,224 $ 16,521 $ 41,699 $ 19,532 $ 6,833 $ 17,284 $ 43,649 FIRST CAPITAL REALTY ANNUAL REPORT 2016 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (c) Stock options As of December 31, 2016, the Company is authorized to grant up to 15.2 million (December 31, 2015 – 15.2 million) common share options to the employees, officers and directors of the Company. As of December 31, 2016, 1.7 million (December 31, 2015 – 2.7 million) common share options are available to be granted to the employees, officers and directors of the Company. In addition, as at December 31, 2016, 4.2 million common share options were outstanding. Options granted by the Company generally expire 10 years from the date of grant and vest over five years. The outstanding options as at December 31, 2016 have exercise prices ranging from $9.81 – $20.24 (December 31, 2015 – $9.81 – $19.96). As at December 31, 2016 December 31, 2015 Outstanding Options Vested Options Outstanding Options Vested Options Number of Common Shares Issuable (in thousands) Weighted Average Exercise Price per Common Share Weighted Average Remaining Life (years) Number of Common Shares Issuable (in thousands) Weighted Average Exercise Price per Common Share Number of Common Shares Issuable (in thousands) 967 $ 15.67 1,203 $ 18.10 817 $ 18.80 1,219 $ 19.74 4,206 $ 18.15 2.3 7.2 6.8 9.0 6.5 967 $ 15.67 461 $ 17.98 400 $ 18.83 42 $ 19.96 1,870 $ 17.01 1,660 $ 1,373 $ 921 $ 245 $ 4,199 $ Weighted Average Exercise Price per Common Share 16.07 18.07 18.82 19.96 17.55 Weighted Average Remaining Life (years) Number of Common Shares Issuable (in thousands) Weighted Average Exercise Price per Common Share 2.6 8.1 7.8 9.2 5.9 1,546 $ 16.10 307 $ 17.87 293 $ 18.88 — 2,146 $ 16.73 — $ Exercise Price Range ($) 9.81 – 17.36 17.37 – 18.40 18.41 – 19.31 19.32 – 20.24 9.81 – 20.24 During the year ended December 31, 2016, $0.7 million (year ended December 31, 2015 – $0.4 million) was recorded as an expense related to stock options. Year ended December 31 Outstanding at beginning of year Granted (a) Exercised (b) Forfeited Expired Outstanding at end of year Number of Common Shares Issuable (in thousands) 4,199 1,000 (931) (60) (2) $ 4,206 $ 2016 Weighted Average Exercise Price 17.56 19.69 17.13 18.98 15.47 18.15 Number of Common Shares Issuable (in thousands) 4,956 907 (1,359) (305) — $ 4,199 $ 2015 Weighted Average Exercise Price 16.89 18.93 15.84 18.46 — 17.55 (a) The fair value associated with the options issued was calculated using the Black-Scholes model for option valuation based on the assumptions in the following table and is recognized as compensation expense over the vesting period. Year ended December 31 Share options granted (thousands) Term to expiry Exercise price Weighted average volatility rate Weighted average expected option life Weighted average dividend yield Weighted average risk free interest rate Fair value (thousands) 2016 1,000 10 years $19.69 15.0% 6 years 4.35% 0.78% $1,082 2015 907 10 years $18.93 15.0% 6 years 4.56% 1.20% $920 (b) The weighted average market share price at which options were exercised for the year ended December 31, 2016 was $21.14 (year ended December 31, 2015 – $19.17). 83 FIRST CAPITAL REALTY ANNUAL REPORT 2016 (d) Share unit plans The Company’s share unit plans include a Directors' Deferred Share Unit ("DSU") Plan and a Restricted Share Unit ("RSU") Plan that provides for the issuance of Restricted Share Units and Performance Share Units ("PSU"). Under the DSU and RSU plans, a participant is entitled to receive one common share, or equivalent cash value, at the Company’s option, (i) in the case of a DSU, upon redemption by the holder after the date that the holder ceases to be a director of the Company and any of its subsidiaries (the “Retirement Date”) but no later than December 15 of the first calendar year commencing after the Retirement Date, and (ii) in the case of a RSU, on December 15 of the third calendar year following the year of grant for RSUs granted prior to June 1, 2015, and, for all subsequent RSUs granted, on the third anniversary of the grant date. Under the PSU plan, a participant is entitled to receive 0.5 – 1.5 common shares per PSU granted, or equivalent cash value at the Company' s option, on the third anniversary of the grant date. Holders of units granted under each plan receive dividends in the form of additional units when the Company declares dividends on its common shares. Year ended December 31 (in thousands) 2016 DSUs RSUs / PSUs DSUs Outstanding at beginning of year Granted (a) Dividends declared Exercised Forfeited Outstanding at end of year Share units available to be granted based on the current reserve (1) Expense recorded for the year (1) Common shares required under the DSU plan or the RSU plan may be issued from treasury or acquired in the secondary market through an intermediary. 374 171 16 (90) — 471 156 $2,335 349 24 14 (112) — 275 220 $530 452 29 17 (149) — 349 258 $670 2015 RSUs 328 121 16 (88) (3) 374 343 $1,888 (a) The fair value of the DSUs granted during the year ended December 31, 2016 was $0.5 million (year ended December 31, 2015 – $0.5 million), measured based on the Company’s prevailing share price on the date of grant. The fair value of the RSUs granted during the year ended December 31, 2016 was $1.3 million (year ended December 31, 2015 – $1.8 million), measured based on the Company’s share price on the date of grant. (b) The fair value of the PSUs granted during the year ended December 31, 2016 was $2.2 million. The fair value is calculated using the Monte-Carlo simulation model based on the assumptions below as well as a market adjustment factor based on the total shareholder return of the Company's common shares relative to the S&P/TSX Capped REIT Index. Year ended December 31 PSUs granted (thousands) Term to expiry Weighted average volatility rate Weighted average correlation Weighted average total shareholder return Weighted average risk free interest rate Fair value (thousands) 2016 106 3 years 13.4% 41.9% 8.8% 0.6% $2,197 The fair value of awards granted under the above plans is recognized as compensation expense over the respective vesting periods. FIRST CAPITAL REALTY ANNUAL REPORT 2016 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 14. NET OPERATING INCOME Net operating income is presented by segment as follows: Year ended December 31, 2016 Property rental revenue Property operating costs Net operating income Year ended December 31, 2015 Property rental revenue Property operating costs Net operating income $ $ $ $ Central Region Eastern Region Western Region Subtotal Other (1) 280,569 $ 177,304 $ 221,480 $ 679,353 $ (3,069) $ 108,496 76,982 73,010 258,488 (4,201) Total 676,284 254,287 172,073 $ 100,322 $ 148,470 $ 420,865 $ 1,132 $ 421,997 Central Region Eastern Region Western Region Subtotal Other (1) 275,312 $ 173,577 $ 208,527 $ 657,416 $ (2,624) $ 105,602 74,802 67,224 247,628 (2,728) Total 654,792 244,900 169,710 $ 98,775 $ 141,303 $ 409,788 $ 104 $ 409,892 (1) Other items principally consist of intercompany eliminations. For the year ended December 31, 2016, property operating costs include $21.6 million (year ended December 31, 2015 – $21.9 million) related to employee compensation. 15. INTEREST AND OTHER INCOME Interest, dividend and distribution income from marketable securities and cash investments Interest income from loans, deposit and mortgages receivable Fees and other income Total 16. INTEREST EXPENSE Note 5 5 Year ended December 31 2015 2016 $ $ 1,129 11,759 6,753 19,641 $ $ 1,605 9,366 6,731 17,702 Mortgages Credit facilities Senior unsecured debentures Convertible debentures (non-cash) Total interest expense Interest capitalized to investment properties under development Interest expense Convertible debenture interest paid in common shares Change in accrued interest Effective interest rate less than (in excess of) coupon interest rate on senior unsecured and convertible debentures Coupon interest rate in excess of effective interest rate on assumed mortgages Amortization of deferred financing costs Cash interest paid associated with operating activities Note 9 9 10 11 11 $ $ $ 85 FIRST CAPITAL REALTY ANNUAL REPORT 2016 $ Year ended December 31 2015 2016 51,327 47,724 4,031 6,641 106,844 112,023 22,118 14,603 184,320 180,991 (20,839) (22,304) 163,481 158,687 (18,857) (13,645) 655 521 (788) (76) $ 2,232 (6,393) 141,326 3,692 (6,283) 141,900 $ 17. CORPORATE EXPENSES Salaries, wages and benefits Non-cash compensation Other corporate costs Total corporate expenses Amounts capitalized to investment properties under development Corporate expenses 18. OTHER GAINS (LOSSES) AND (EXPENSES) Realized gain (loss) on sale of marketable securities Unrealized gain (loss) on marketable securities classified as FVTPL Net gain (loss) on prepayments of debt Proceeds from Target Investment properties selling costs Restructuring costs Other Total Year ended December 31 2016 27,251 3,469 10,627 41,347 (6,437) 34,910 2015 29,164 2,941 11,486 43,591 (7,931) 35,660 $ $ Year ended December 31 2016 79 1,071 (1,119) 3,813 (2,435) (1,988) (7) (586) $ 2015 784 (2,022) (310) — (522) (13,085) — $ (15,155) $ $ $ $ During the second quarter, the Company recognized a $1.2 million loss on prepayment of debt related to the redemption of series G and H convertible debentures. During the year, the Company recognized $3.8 million in proceeds under Target Canada's CCAA plan of arrangement related to the closure of two Target stores in the Company's portfolio in 2015. 19. INCOME TAXES The sources of deferred tax balances and movements are as follows: December 31, 2015 Net income Recognized in OCI Equity and other December 31, 2016 Deferred taxes related to non-capital losses $ (37,994) $ 10,922 $ Deferred tax liabilities related to difference in tax and book basis primarily related to real estate, net 542,695 79,648 (1,506) $ 3,450 (1,671) $ (2,251) (30,249) 623,542 Net deferred taxes $ 504,701 $ 90,570 $ 1,944 $ (3,922) $ 593,293 As at December 31, 2016, the Company had approximately $114.9 million of non-capital losses which expire between 2027 and 2035. December 31, 2014 Net income Recognized in OCI Equity and other December 31, 2015 Deferred taxes related to non-capital losses $ (21,388) $ (14,157) $ Deferred tax liabilities related to difference in tax and book basis primarily related to real estate, net 475,291 70,000 (1,421) $ (1,605) (1,028) $ (991) (37,994) 542,695 Net deferred taxes $ 453,903 $ 55,843 $ (3,026) $ (2,019) $ 504,701 FIRST CAPITAL REALTY ANNUAL REPORT 2016 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued As at December 31, 2015, the Company had approximately $143.8 million of non-capital losses which expire between 2016 and 2035. The following reconciles the Company’s expected tax expense computed at the statutory tax rate to its actual tax expense for the year ended December 31, 2016 and 2015: Year ended December 31 Income tax expense at the Canadian federal and provincial income tax rate of 26.6% (2015 – 26.4%) $ 126,712 $ 2016 Increase (decrease) in income taxes due to: Non-taxable portion of capital gains and other Impact of change in statutory income tax rate Other Deferred income taxes 2015 68,527 (19,574) 7,375 (485) (38,883) (1,207) 3,948 $ 90,570 $ 55,843 The current Canadian federal and provincial tax rate of 26.6% increased from 26.4% primarily due to an increase in the general corporate income tax rate in the Province of Alberta during the second quarter of 2015. During the fourth quarter of 2016, the Province of Quebec reduced its general corporate income tax rate, which impacted the measurement of the Company's deferred taxes. 20. PER SHARE CALCULATIONS The following table sets forth the computation of per share amounts: Net income attributable to common shareholders Adjustment for dilutive effect of convertible debentures, net of tax Income for diluted per share amounts (in thousands) Weighted average number of shares outstanding for basic per share amounts Options Convertible debentures Weighted average diluted share amounts Year ended December 31 $ $ 2016 382,714 9,276 391,990 235,671 572 10,185 246,428 $ $ 2015 203,865 10,037 213,902 223,644 424 11,802 235,870 The following securities were not included in the diluted net income per share calculation as the effect would have been anti-dilutive: Year ended December 31 (in dollars, number of shares in thousands) Common share options Convertible debentures - Series E - 5.40% Convertible debentures - Series G - 5.25% Exercise Price $19.96 $22.62 $23.25 Number of Shares if Exercised 2016 — — N/A 2015 246 2,795 2,491 87 FIRST CAPITAL REALTY ANNUAL REPORT 2016 21. RISK MANAGEMENT In the normal course of its business, the Company is exposed to a number of risks that can affect its operating performance. Certain of these risks, and the actions taken to manage them, are as follows: (a) Interest rate risk The Company structures its financings so as to stagger the maturities of its debt, thereby mitigating its exposure to interest rate and other credit market fluctuations. A portion of the Company’s mortgages, loans and credit facilities are floating rate instruments. From time to time, the Company may enter into interest rate swap contracts, bond forwards or other financial instruments to modify the interest rate profile of its outstanding debt or highly probable future debt issuances without an exchange of the underlying principal amount. Interest represents a significant cost in financing the ownership of real property. The Company has a total of $1.0 billion principal amount of fixed rate interest-bearing instruments outstanding including mortgages, senior unsecured debentures and convertible debentures maturing between January 1, 2017 and December 31, 2019 at a weighted average coupon interest rate of 5.5%. If these amounts were refinanced at an average interest rate that was 100 basis points higher or lower than the existing rate, the Company’s annual interest cost would increase or decrease, respectively, by $10.2 million. The Company’s loans and mortgages receivable earn interest at fixed rates. If the loans were refinanced at 100 basis points higher or lower than the existing rate, the Company’s annual interest income would increase or decrease by approximately $1.4 million. (b) Credit risk Credit risk arises from the possibility that tenants and/or debtors may experience financial difficulty and be unable or unwilling to fulfill their lease commitments or loan obligations. The Company mitigates the risk of credit loss from tenants by investing in well-located properties in urban markets that attract high quality tenants, ensuring that its tenant mix is diversified, and by limiting its exposure to any one tenant. As at December 31, 2016, Loblaw Companies Limited (“Loblaw”) accounts for 10.2% of the Company’s annualized minimum rent and has an investment grade credit rating. Other than Loblaw, no other tenant accounts for more than 10% of the annualized minimum rent. A tenant’s success over the term of its lease and its ability to fulfill its lease obligations is subject to many factors. There can be no assurance that a tenant will be able to fulfill all of its existing commitments and leases up to the expiry date. The Company typically mitigates the risk of credit loss from debtors by obtaining registered mortgage charges on real estate properties. The Company’s leases typically have lease terms between 5 and 20 years and may include clauses to enable periodic upward revision of the rental rates, and lease contract extension at the option of the lessee. Future minimum rentals receivable under non-cancellable operating leases as at December 31 are as follows: As at December 31, 2016 Within 1 year After 1 year, but not more than 5 years More than 5 years $ 417,917 1,146,685 763,076 $ 2,327,678 (c) Liquidity risk Real estate investments are relatively illiquid. This tends to limit the Company’s ability to sell components of its portfolio promptly in response to changing economic or investment conditions. If the Company were required to quickly liquidate its assets, there is a risk that it would realize sale proceeds of less than the current value of its real estate investments. FIRST CAPITAL REALTY ANNUAL REPORT 2016 88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued An analysis of the Company’s contractual maturities of its material financial liabilities and other contractual commitments as at December 31, 2016 is set out below: As at December 31, 2016 Payments Due by Period Scheduled mortgage principal amortization Mortgage principal repayments on maturity Credit facilities and bank indebtedness Senior unsecured debentures Convertible debentures Interest obligations (1) Land leases (expiring between 2023 and 2061) Contractual committed costs to complete current development projects Other committed costs Total contractual obligations (2) 2017 2018 to 2019 2020 to 2021 Thereafter Total $ 27,335 $ 82,902 7,785 250,000 108,147 158,927 964 61,560 44,172 $ 36,407 $ 41,643 $ 231,035 60,245 300,000 — 265,319 1,958 5,818 119,255 199,365 350,000 — 196,824 1,968 — 413,176 — 1,650,000 — 201,044 15,219 — 149,557 846,368 267,395 2,550,000 108,147 822,114 20,109 67,378 — 16,703 — — 16,703 $ 697,620 $ 925,250 $ 903,819 $ 2,321,082 $ 4,847,771 (1) Interest obligations include expected interest payments on mortgages and credit facilities as at December 31, 2016 (assuming balances remain outstanding through to maturity), and senior unsecured debentures, as well as standby credit facility fees. (2) The Company has the option to satisfy its obligations of principal and interest payments in respect of all of its outstanding convertible debentures by the issuance of common shares, and as such, convertible debentures have been excluded from this table unless the Company has disclosed its intention to settle in cash. The Company manages its liquidity risk by staggering debt maturities; renegotiating expiring credit arrangements proactively; using revolving credit facilities; and issuing equity when considered appropriate. As at December 31, 2016, there was $183.5 million (December 31, 2015 – $195.0 million) of cash advances drawn against the Company’s revolving credit facilities. In addition, as at December 31, 2016, the Company has $48.2 million (December 31, 2015 – $55.6 million) of bank overdrafts and outstanding letters of credit issued by financial institutions primarily to support certain of the Company’s contractual obligations. 22. FAIR VALUE MEASUREMENT Fair value A comparison of the carrying amounts and fair values, by class, of the Company’s financial instruments, other than those whose carrying amounts approximate their fair values, is as follows: As at December 31 Carrying Amount Fair Value Financial assets FVTPL investments in equity securities AFS investments in equity securities Loans and mortgages receivable Derivatives at fair value Financial liabilities Mortgages Credit facilities Senior unsecured debentures Convertible debentures Derivatives at fair value 89 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Notes 2016 2015 2016 2015 $ $ 6 6 6 8 10 10 11 12 13 12,969 $ 3,824 147,236 12,438 11,907 $ 4,269 143,672 — 12,969 $ 3,824 144,379 12,438 11,907 4,269 141,354 — 997,165 $ 1,024,002 $ 251,481 2,546,442 207,633 6,469 224,635 2,244,091 327,343 8,959 996,835 $ 1,048,090 224,635 251,481 2,414,392 2,691,059 341,874 214,423 8,959 6,469 The fair values of the Company’s cash and cash equivalents, amounts receivable, restricted cash and accounts payable and other liabilities approximate their carrying values as at December 31, 2016 and 2015 due to their short term nature. The fair values of the Company’s investments in FVTPL as well as any short positions in marketable securities, are based on quoted market prices. The Company has an investment in a fund classified as Level 3 AFS equity securities, for which the fair value is based on the fair value of the properties held in the fund. The fair value of the Company’s loans and mortgages receivable classified as Level 3, are calculated based on current market rates plus borrower level risk-adjusted spreads on discounted cash flows, adjusted for allowances for non-payment and collateral related risk. As at December 31, 2016, the risk-adjusted interest rates ranged from 4.0% to 15.0% (December 31, 2015 – 4.0% to 10.0%). The fair value of the Company’s mortgages and credit facilities payable are calculated based on current market rates plus risk-adjusted spreads on discounted cash flows. As at December 31, 2016, these rates ranged from 2.3% to 3.6% (December 31, 2015 – 2.3% to 3.3%). The fair value of the senior unsecured debentures are based on closing bid risk-adjusted spreads and current underlying Government of Canada bond yields on discounted cash flows. For the purpose of this calculation, the Company uses, among others, interest rate quotations provided by financial institutions. As at December 31, 2016, these rates ranged from 1.1% to 3.7% (December 31, 2015 – 1.7% to 3.8%). The fair values of the convertible debentures are based on the TSX closing bid prices. The fair value hierarchy of financial instruments on the audited annual consolidated balance sheets is as follows: As at December 31, 2016 December 31, 2015 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Measured at fair value Financial Assets FVTPL investments in equity securities AFS investments in limited partnership Derivatives at fair value – assets Financial Liabilities Derivatives at fair value – liabilities Measured at amortized cost Financial Assets Loans and mortgages receivable Financial Liabilities Mortgages Credit facilities Senior unsecured debentures Convertible debentures $ 12,969 $ — — — $ — 12,438 — $ 3,824 — 11,907 $ — — — $ — — — 4,269 — — 6,469 — — 8,959 — $ — $ — $ 144,379 $ — $ — $ 141,354 — 996,835 251,481 — — 2,691,059 — 214,423 — — — — — 1,048,090 224,635 — — 2,414,392 — 341,874 — — — — The Company enters into derivative instruments including bond forward contracts, interest rate swaps and cross currency swaps as part of its strategy for managing certain interest rate risks as well as currency risk in relation to movements in the Canadian to U.S. exchange rate. For those derivative instruments to which the Company has applied hedge accounting, the change in fair value for the effective portion of the derivative is recorded in other comprehensive income from the date of designation. For those derivative instruments to which the Company does not apply hedge accounting, the change in fair value is recognized in other gains (losses) and (expenses). The fair value of derivative instruments is determined using present value forward pricing and swap calculations at interest rates that reflect current market conditions. The models also take into consideration the credit quality of counterparties, interest rate curves and forward rate curves. As at December 31, 2016, the interest rates ranged from 1.7% to 3.3% (December 31, 2015 – 1.5% to 3.2%). FIRST CAPITAL REALTY ANNUAL REPORT 2016 90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued The fair values of the Company's asset (liability) hedging instruments are as follows: Designated as Hedging Instrument Maturity as at December 31, 2016 December 31, 2016 December 31, 2015 Derivative assets Bond forward contracts Interest rate swaps Cross currency swaps Total Derivative liabilities Bond forward contracts Interest rate swaps Total Yes Yes No Yes Yes February 2017 January 2026 - September 2026 January 2017 February 2017 March 2022 - June 2025 $ $ $ $ 6,279 2,683 3,476 12,438 — 6,469 6,469 $ $ $ $ — — — — 788 8,171 8,959 23. INVESTMENT IN JOINT VENTURES As at December 31, 2016, the Company had interests in two joint ventures that it accounts for using the equity method. The Company, through direct and indirect investment, owns on a consolidated basis a 53.1% interest in M+M Urban Realty LP (“Main and Main Urban Realty”), a joint venture between the Company, Main and Main Developments LP (“MMLP”, further described in Note 24) and an institutional investor. The Company has determined that Main and Main Urban Realty is a joint venture as all decisions regarding its activities are made unanimously as between MMLP and the Company on one hand, and the institutional investor on the other hand. In addition, the Company has a 50% interest in a joint venture that operates a shopping centre known as "College Square" located in Ottawa, Ontario. Summarized financial information of the joint ventures’ financial position and performance is set out below: As at Total assets Total liabilities Net assets at 100% The Company's investment in equity accounted joint ventures For the year ended Revenue Expenses Increase in value of investment properties, net Income before income taxes Current income tax expense (recovery) Net income and total comprehensive income at 100% The Company's share of income in equity accounted joint ventures December 31, 2016 December 31, 2015 $ 526,284 220,371 305,913 $ 399,759 93,649 306,110 $ 146,422 $ 160,119 December 31, 2016 December 31, 2015 $ $ $ $ 18,407 9,740 9,072 17,739 (11) 17,750 12,437 $ $ $ $ 16,940 7,865 9,545 18,620 15 18,605 12,178 As at December 31, 2016, MMLP and its joint venture partners have collectively committed a total of $320.0 million of equity capital for the current growth and the future development of the Main and Main Urban Realty portfolio. As at December 31, 2016, the Company’s direct and indirect commitment was approximately $167.0 million, of which $120.3 million had been invested as at December 31, 2016 (December 31, 2015 – $96.7 million). During 2016, the Company received distributions from its joint ventures of $52.5 million (2015 - $47.6 million) and made contributions to its joint ventures of $25.0 million (2015 - $57.0 million). As at December 31, 2016, Main and Main Urban Realty had outstanding commitments related to acquisitions, subject to customary closing conditions, as well as capital commitments for an aggregate amount of $17.2 million. There were no outstanding commitments for College Square as at December 31, 2016. The Company's share of these outstanding 91 FIRST CAPITAL REALTY ANNUAL REPORT 2016 commitments relating to its joint ventures at its interest is $9.1 million. Main and Main Urban Realty and College Square did not have any contingent liabilities as at December 31, 2016 and 2015. 24. SUBSIDIARY WITH NON-CONTROLLING INTEREST The Company contractually controls MMLP, a subsidiary in which it holds a 67% ownership interest, until such time that all loans receivable from the joint venture partner have been paid in full. At such time that the loans receivable to the Company are repaid, all decisions regarding the activities of MMLP will require unanimous consent of the partners. Non-controlling interest in the equity and the results of this subsidiary, before any inter-company eliminations, are as follows: Non-current assets Current assets Total assets Non-current liabilities Current liabilities Total liabilities Net assets Non-controlling interests Revenue Share of profit from joint ventures Expenses Increase in value of investment properties, net Net income Non-controlling interests Cash provided by operating activities Cash provided by financing activities Cash used in investing activities Net decrease in cash and cash equivalents December 31, 2016 December 31, 2015 $ $ $ $ $ $ $ $ $ 111,865 3,471 115,336 — 729 729 114,607 37,820 $ $ $ $ 84,724 1,746 86,470 — 502 502 85,968 28,362 Year ended December 31 2016 3,341 9,258 3,274 — 9,325 3,078 2015 2,168 602 3,189 — (419) (137) $ $ $ Year ended December 31 2016 310 19,314 (17,883) 1,741 $ $ 2015 (940) 2,813 (706) 1,167 FIRST CAPITAL REALTY ANNUAL REPORT 2016 92 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued 25. CO-OWNERSHIP INTERESTS The Company has co-ownership interests in several properties, as listed below, that are subject to joint control and represent joint operations under IFRS 11. The Company recognizes its share of the direct rights to the assets and obligations for the liabilities of these co-ownerships in the consolidated financial statements. Property 101 Yorkville Avenue 2150 Lake Shore Blvd. West 816-838 11th Ave. (Glenbow) King High Line McLaughlin Corners Midland (land) Rutherford Marketplace (land) Hunt Club – Petrocan Kanata Terry Fox (land) Hunt Club Marketplace Lachenaie Properties South Oakville Properties (1) Whitby Mall Thickson Mall Bow Valley Crossing (land) Seton Gateway Sherwood Park The Edmonton Brewery District West Oaks Mall West Springs Village Location Toronto, ON Toronto, ON Calgary, AB Toronto, ON Brampton, ON Midland, ON Vaughan, ON Ottawa, ON Ottawa, ON Ottawa, ON Lachenaie, QC Oakville, ON Whitby, ON Whitby, ON Calgary, AB Calgary, AB Sherwood Park, AB Edmonton, AB Abbotsford, BC Calgary, AB Ownership Interest December 31, 2016 50% 50% 50% 50% 50% 50% 50% 50% 50% 33% 50% 50% 50% 50% 75% 50% 50% 50% 50% 50% December 31, 2015 —% —% —% 50% 50% 50% 100% 50% 50% 33% 100% 50% —% 100% 75% 50% 50% 50% 50% 50% (1) South Oakville Properties includes one property at 50% interest, with the remaining properties held at 100% interest. 26. SUPPLEMENTAL OTHER COMPREHENSIVE INCOME (LOSS) INFORMATION (a) Accumulated other comprehensive loss Year ended December 31 2016 Opening Balance January 1 Net Change During the Year Closing Balance December 31 Opening Balance January 1 Net Change During the Year 2015 Closing Balance December 31 Unrealized gains (losses) on AFS investments in equity securities Unrealized gains (losses) on cash flow hedges Accumulated other comprehensive loss $ 45 $ — $ 45 $ (53) $ 98 $ 45 (17,107) 5,364 (11,743) (9,017) (8,090) (17,107) $ (17,062) $ 5,364 $ (11,698) $ (9,070) $ (7,992) $ (17,062) 93 FIRST CAPITAL REALTY ANNUAL REPORT 2016 (b) Tax effects relating to each component of other comprehensive (loss) income Year ended December 31 Unrealized gains (losses) on AFS investments in equity securities $ Reclassification of losses on AFS equity securities to net income Unrealized gains (losses) on cash flow hedges Reclassification of losses on cash flow hedges to net income Before-Tax Amount Tax (Expense) Recovery 2016 Net of Tax Amount Before-Tax Amount Tax (Expense) Recovery — $ — $ — $ (34) $ 5 $ — — — 147 (20) 2015 Net of Tax Amount (29) 127 5,790 1,518 (1,540) (404) 4,250 1,114 (12,232) 3,334 (8,898) 1,101 (293) 808 Other comprehensive (loss) income $ 7,308 $ (1,944) $ 5,364 $ (11,018) $ 3,026 $ (7,992) 27. SUPPLEMENTAL CASH FLOW INFORMATION (a) Items not affecting cash and other items Straight-line rent adjustment Investment properties selling costs Realized (gain) loss on sale of marketable securities Unrealized (gain) loss on marketable securities classified as FVTPL Net (gain) loss on prepayments of debt Non-cash compensation expense Deferred income taxes Other non-cash items Total Note 18 18 18 18 19 (b) Net change in non-cash operating items The net change in non-cash operating assets and liabilities consists of the following: Amounts receivable Prepaid expenses Trade payables and accruals Tenant security and other deposits Other working capital changes Total $ $ $ $ $ Year ended December 31 2015 (4,957) 522 (784) 2,022 310 3,098 55,843 7,113 63,167 2016 (5,848) 2,435 (79) (1,071) 1,119 3,698 90,570 (18) 90,806 $ $ Year ended December 31 2015 (1,124) 1,237 2,173 1,749 (3,472) 563 2016 (3,470) (2,307) (2,396) 3,167 (3,700) (8,706) $ FIRST CAPITAL REALTY ANNUAL REPORT 2016 94 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – continued (c) Changes in loans, mortgages and other real estate assets Advances of loans and mortgages receivable Repayments of loans and mortgages receivable Deposit on investment property Investment in marketable securities, net Proceeds from disposition of marketable securities Total (d) Cash and cash equivalents (bank indebtedness) Year ended December 31 2015 (48,349) 43,445 — (3,154) 24,572 16,514 2016 (54,521) $ 59,797 (189,200) (742) 830 (183,836) $ $ $ As at Cash (1) Bank indebtedness Total December 31, 2016 12,217 (15,914) (3,697) $ $ December 31, 2015 9,164 (26,200) (17,036) $ $ (1) Principally consisting of cash related to co-ownerships and properties managed by third parties. 28. COMMITMENTS AND CONTINGENCIES (a) The Company is involved in litigation and claims which arise from time to time in the normal course of business. None of these contingencies, individually or in aggregate, would result in a liability that would have a significant adverse effect on the financial position of the Company. (b) The Company is contingently liable, jointly and severally or as guarantor, for approximately $108.1 million (December 31, 2015 – $78.4 million) to various lenders in connection with certain third-party obligations, including, without limitation, loans advanced to its joint arrangement partners secured by the partners’ interest in the joint arrangements and underlying assets. (c) The Company is contingently liable by way of letters of credit in the amount of $32.3 million (December 31, 2015 – $29.4 million), issued by financial institutions on the Company's behalf in the ordinary course of business. (d) The Company has obligations as lessee under long-term leases for land. Annual commitments under these ground leases are approximately $1.0 million (December 31, 2015 – $0.9 million) with a total obligation of $20.1 million (December 31, 2015 – $21.1 million). (e) The Company is involved, in the normal course of business, in discussions, and has various agreements, with respect to possible acquisitions of new properties and dispositions of existing properties in its portfolio. None of these commitments or contingencies, individually or in aggregate, would have a significant impact on the financial position of the Company. (f) The Company is contingently liable by way of a put option on a property by the owner that is exercisable up to October 2022. 29. RELATED PARTY TRANSACTIONS (a) Significant Shareholder Gazit-Globe Ltd. (“Gazit”) is a significant shareholder of the Company and, as of December 31, 2016, beneficially owns 36.4% (December 31, 2015 – 42.2%) of the common shares of the Company. Norstar Holdings Inc. is the ultimate controlling party of Gazit. 95 FIRST CAPITAL REALTY ANNUAL REPORT 2016 Corporate and other amounts receivable include amounts due from Gazit. Gazit reimburses the Company for certain accounting and administrative services provided to it by the Company. Such amounts consist of the following: Reimbursements for professional services Year ended December 31 2015 2016 $ 189 $ 213 As at December 31, 2016, amounts due from Gazit were $0.1 million (December 31, 2015 – $0.1 million). Effective April 3, 2016, a shareholders’ agreement between Gazit and Alony-Hetz Properties and Investments Ltd. (‘‘Alony- Hetz’’) was terminated and Mr. Nathan Hetz, the Chief Executive Officer and a director of Alony-Hetz, stepped down from the Board of Directors of First Capital Realty on April 4, 2016. As of March 31, 2016, the last date that Alony-Hetz reported its shareholdings to First Capital Realty, it beneficially owned 6.2% of the common shares of the Company. Pursuant to the terminated shareholders’ agreement, among other terms, (i) Gazit agreed to vote its common shares of the Company in favour of the election of up to two representatives of Alony-Hetz to the Board of Directors of the Company, and (ii) Alony- Hetz agreed to vote its common shares of the Company as directed by Gazit with respect to the election of the remaining directors of the Company. (b) Joint venture During the year ended December 31, 2016, a subsidiary of Main and Main Developments LP earned property-related and asset management fees from M+M Urban Realty LP, which are included in the Company’s consolidated fees and other income in the amount of $2.9 million, (December 31, 2015 – $1.9 million). (c) Subsidiaries of the Company These audited annual consolidated financial statements include the financial statements of First Capital Realty and all of First Capital Realty's subsidiaries, including First Capital Holdings Trust. First Capital Holdings Trust is the only significant subsidiary of First Capital Realty and is wholly owned by the Company. (d) Compensation of Key Management Personnel Aggregate compensation for directors and the Chief Executive Officer, Chief Financial Officer, and Chief Operating Officer (1) included in corporate expenses is as follows: Salaries and short-term employee benefits Share-based compensation (non-cash compensation expense) (1) Chief Operating Officer joined FCR effective June 1, 2016. 30. SUBSEQUENT EVENTS Redemption of Convertible Debentures Year ended December 31 2016 3,805 2,315 6,120 $ $ 2015 3,225 1,661 4,886 $ $ On January 31, 2017, the Company redeemed its remaining 5.40% Series E and 5.25% Series F convertible debentures at par. The full redemption price and any accrued interest owing on each series of convertible debentures was satisfied in cash. First Quarter Dividend The Company announced that it will pay a first quarter dividend of $0.215 per common share on April 11, 2017 to shareholders of record on March 29, 2017. FIRST CAPITAL REALTY ANNUAL REPORT 2016 96 Shareholder Information TORONTO STOCK EXCHANGE LISTINGS AUDITORS 4.75% Convertible Debentures: FCR.DB.I 4.45% Convertible Debentures: FCR.DB.J TRANSFER AGENT Computershare Trust Company of Canada 100 University Avenue, 11th Floor Toronto, Ontario M5J 2Y1 Toll-free: 1 800 564 6253 EXECUTIVE LEADERSHIP TEAM Adam E. Paul President and Chief Executive Ofﬁcer Kay Brekken Executive Vice President and Chief Financial Ofﬁcer Jordan Robins Executive Vice President and Chief Operating Ofﬁcer Gareth Burton Senior Vice President, Construction Roger J. Chouinard General Counsel and Corporate Secretary Carmine Francella Senior Vice President, Leasing Sandra Levy Vice President, People and Corporate Affairs Maryanne McDougald Senior Vice President, Operations Gregory J. Menzies Project Lead, Yorkville Village Jodi M. Shpigel Senior Vice President, Development Ernst & Young LLP Toronto, Ontario DIRECTORS Dori J. Segal Chairman, First Capital Realty Inc. Toronto, Ontario Jon Hagan, C.P.A., C.A. Consultant, JN Hagan Consulting Barbados Chaim Katzman Corporate Director North Miami Beach, Florida Allan S. Kimberley Corporate Director Toronto, Ontario Annalisa King Corporate Director Vancouver, British Columbia Susan J. McArthur Managing Partner, Greensoil Investments Toronto, Ontario Bernard McDonell Corporate Director Apple Hill, Ontario Adam E. Paul, C.P.A., C.A President and Chief Executive Ofﬁcer, First Capital Realty Inc. Toronto, Ontario Andrea Stephen, C.P.A., C.A. Corporate Director Toronto, Ontario HEAD OFFICE Shops at King Liberty 85 Hanna Avenue, Suite 400 Toronto, Ontario M6K 3S3 Tel: 416 504 4114 Fax: 416 941 1655 MONTREAL OFFICE Place Viau 7600 boulevard Viau, Suite 113 Montréal, Québec H1S 2P3 Tel: 514 332 0031 Fax: 514 332 5135 CALGARY OFFICE Mount Royal Village, Suite 400 1550 8th Street SW Calgary, Alberta T2R 1K1 Tel: 403 257 6888 Fax: 403 257 6899 EDMONTON OFFICE Northgate Centre, Unit 2004 9499-137 Avenue Edmonton, Alberta T5E 5R8 Tel: 780 475 3695 Fax: 780 478 6716 VANCOUVER OFFICE Shops at New West 800 Carnarvon Street, Suite 320 New Westminster, BC V3M 0G3 Tel: 604 278 0056 Fax: 604 242 0266 www.fcr.ca 85 Hanna Avenue, Suite 400, Toronto, Ontario M6K 3S3 T 416 504 4114 F 416 941 1655 www.fcr.ca

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